Form S-4 Amendment #1
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As filed with the Securities and Exchange Commission on July 28, 2004

Registration No. 333-116617


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


AMENDMENT NO. 1

TO

FORM S-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


BLOCKBUSTER INC.

(Exact name of Registrant as specified in its charter)


Delaware   7841   52-1655102

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)


1201 Elm Street

Dallas, Texas 75270

(214) 854-3000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)


Edward B. Stead

Executive Vice President and General Counsel

Blockbuster Inc.

1201 Elm Street

Dallas, Texas 75270

(214) 854-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

Michael D. Fricklas

Executive Vice President,

General Counsel and Secretary

Viacom Inc.

1515 Broadway

New York, NY 10036

(212) 258-6000

 

Stephen T. Giove

Creighton O’M. Condon

Christa A. D’Alimonte

Shearman & Sterling LLP

599 Lexington Avenue

New York, NY 10022

(212) 848-4000

 

Alan J. Bogdanow

Vinson & Elkins L.L.P.

3700 Trammell Crow Center

2001 Ross Avenue

Dallas, TX 75201

(214) 220-7700


Approximate date of commencement of proposed sale to the public:    As promptly as practicable after the filing of this Registration Statement and other conditions to the commencement of the exchange offer described herein have been satisfied or waived.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨


CALCULATION OF REGISTRATION FEE


Title of each class of securities to be registered   

Amount to

be registered (1)

  

Proposed maximum

offering price per unit

  

Proposed maximum

aggregate offering

price (2)

  

Amount of

registration

fee (3)

Class A common stock, par value $0.01 per share

   (4)    N/A              

Class B common stock, par value $0.01 per share

   (4)    N/A              

            Total

   144,000,000    N/A    $ 2,210,400,000    $ 280,057.68

(1) Represents the maximum number of shares of class A common stock, par value $0.01 per share (the “Blockbuster class A common stock”), of Blockbuster Inc., a Delaware corporation (“Blockbuster”), and shares of class B common stock, par value $0.01 per share (the “Blockbuster class B common stock”), of Blockbuster offered in exchange for shares of class A common stock, par value $0.01 per share, and class B common stock, par value $0.01 per share, of Viacom Inc., a Delaware corporation (“Viacom”), as described in the Prospectus-Offer to Exchange filed as part of this Registration Statement.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rules 457(f)(1) and (3) and Rule 457(c) of the Securities Act of 1933, as amended (the “Securities Act”), based on $15.35, the average of the high and low sales prices of Blockbuster class A common stock as reported by the New York Stock Exchange on June 14, 2004. Because there is no trading market for Blockbuster class B common stock, the Blockbuster class A common stock is believed to be the most appropriate measure of the value of the securities to be exchanged in this exchange offer for purposes of calculating the filing fee.
(3) Computed in accordance with Rule 457(f) under the Securities Act to be $280,057.68, which is equal to 0.0001267 multiplied by the proposed maximum aggregate offering price of $2,210,400,000.00. The filing fee of $280,057.68 was previously paid by Blockbuster in connection with the initial filing of this Registration Statement on June 18, 2004.
(4) Registered hereunder are an indeterminable number of shares of Blockbuster class A common stock and an indeterminable number of shares of Blockbuster class B common stock, in an amount not to exceed 144,000,000 shares of Blockbuster common stock in the aggregate. The amount of shares of Blockbuster class A common stock and Blockbuster class B common stock to be registered hereunder will be determined prior to the declaration of the effectiveness of this Registration Statement by the Securities and Exchange Commission.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS-OFFER TO EXCHANGE IS NOT COMPLETE AND MAY BE CHANGED. VIACOM MAY NOT SELL OR EXCHANGE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS-OFFER TO EXCHANGE IS NOT AN OFFER TO SELL OR EXCHANGE THESE SECURITIES AND VIACOM IS NOT SOLICITING OFFERS TO BUY OR EXCHANGE THESE SECURITIES IN ANY STATE WHERE THE EXCHANGE OFFER OR SALE IS NOT PERMITTED.

 

PRELIMINARY PROSPECTUS-OFFER TO EXCHANGE, DATED JULY 28, 2004

SUBJECT TO COMPLETION

VIACOM INC.

Offer to Exchange

[            ] Shares of Class A Common Stock

and

[            ] Shares of Class B Common Stock

of

BLOCKBUSTER INC.

which are owned by Viacom Inc.

for

Each Outstanding Share of Class A Common Stock or Class B Common Stock

of

VIACOM INC.

 

THIS EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON [            ], 2004 UNLESS THE OFFER IS EXTENDED. SHARES TENDERED PURSUANT TO THIS EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION OF THIS EXCHANGE OFFER.

Viacom is offering to exchange [            ] shares of Blockbuster class A common stock and [            ] shares of Blockbuster class B common stock for each outstanding share of Viacom class A or class B common stock that is validly tendered and not properly withdrawn. The terms and conditions of this exchange offer are described in this Prospectus-Offer to Exchange, which you should read carefully. Neither Viacom nor Blockbuster, nor any of their respective directors or officers, nor the co-dealer managers, makes any recommendation as to whether you should participate in this exchange offer. You must make your own decision after reading this document and consulting with your advisors.

Viacom’s obligation to exchange shares of Blockbuster class A and class B common stock for shares of Viacom class A or class B common stock is subject to the conditions listed under “The Exchange Offer—Conditions for Completion of this Exchange Offer” beginning on page 64. Viacom’s class A and class B common stock are listed on the New York Stock Exchange under the symbols “VIA” and “VIAB,” respectively, and Blockbuster’s class A common stock is listed on the New York Stock Exchange under the symbol “BBI.” Blockbuster intends to apply for the listing of shares of its class B common stock on the New York Stock Exchange. There is no historical trading market for Blockbuster’s class B common stock because Viacom has owned all of the issued and outstanding shares of Blockbuster class B common stock since their issuance. Shares of Blockbuster class A common stock are entitled to one vote per share. Shares of Blockbuster class B common stock are currently entitled to five votes per share, and after completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this Prospectus-Offer to Exchange or determined if this Prospectus-Offer to Exchange is accurate or adequate. Any representation to the contrary is a criminal offense.

See “ Risk Factors” beginning on page 30 for a discussion of certain factors that you should consider in connection with this exchange offer.

The co-dealer managers for this exchange offer are:

BEAR, STEARNS & CO. INC.

and

GOLDMAN, SACHS & CO.

This document incorporates by reference important business and financial information about Viacom and Blockbuster from documents filed with the Securities and Exchange Commission that have not been included in or delivered with this document. This information is available at the website that the Securities and Exchange Commission maintains at http://www.sec.gov, as well as from other sources. See “Where You Can Find More Information About Viacom and Blockbuster” beginning on page 139.

You also may ask any questions about this exchange offer or request copies of the exchange offer documents from Viacom, without charge, upon written or oral request to Viacom’s information agent, [                    ], located at [                    ] at [                    ] (toll-free) in the United States or at [                    ] (collect) elsewhere. In order to receive timely delivery of the documents, you must make your requests no later than [            ], 2004.


The date of this Prospectus-Offer to Exchange is [            ], 2004.


Table of Contents

TABLE OF CONTENTS

 

     Page

LETTER FROM BLOCKBUSTER CHAIRMAN & CEO JOHN ANTIOCO

   1

QUESTIONS AND ANSWERS ABOUT THIS EXCHANGE OFFER

   6

SUMMARY

   15

RISK FACTORS

   30

Risk Factors Relating to Viacom’s Business

   30

Risk Factors Relating to Blockbuster’s Business

   33

Risk Factors Relating to this Exchange Offer

   43

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

   48

RECENT DEVELOPMENTS

   49

THE TRANSACTION

   50

Background of this Exchange Offer

   50

Reasons for this Exchange Offer

   52

Effects of this Exchange Offer

   52

Participation by National Amusements

   53

Blockbuster Equity Capitalization Following this Exchange Offer

   53

Blockbuster Charter and Bylaw Amendments

   53

Blockbuster Director Resignations

   54

No Appraisal Rights

   54

Litigation Relating to this Exchange Offer

   54

Regulatory Approval

   55

Accounting Treatment

   55

Tax Treatment

   55

THE EXCHANGE OFFER

   56

Terms of this Exchange Offer

   56

Proration; Tenders for Exchange by Holders of Fewer than 100 Shares of Viacom Class A or Class B Common Stock

   57

Fractional Shares

   57

Exchange of Shares of Viacom Common Stock

   57

Procedures for Tendering

   58

Lost or Destroyed Certificates

   62

Withdrawal Rights

   62

Book-Entry Accounts

   63

Extension; Termination; Amendment

   63

Conditions for Completion of this Exchange Offer

   64

Fees and Expenses

   66

Legal Limitations

   67

SPIN-OFF AND DISPOSITIONS OF BLOCKBUSTER COMMON STOCK

   68

Spin-Off of Blockbuster Class B Common Stock and Converted Class A Common Stock

   68

Disposition of Blockbuster Class A Common Stock

   68

BLOCKBUSTER STOCK OPTION MATTERS

   69

MARKET PRICES AND DIVIDEND INFORMATION

   71

Shares of Viacom Class A and Class B Common Stock and Dividends

   71

Shares of Blockbuster Class A and Class B Common Stock and Dividends

   72

CAPITALIZATION OF VIACOM AND BLOCKBUSTER

   74

VIACOM UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

   76

NOTES TO VIACOM UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

   82

 

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     Page

BLOCKBUSTER UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

   84

NOTES TO BLOCKBUSTER UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

   87

AGREEMENTS BETWEEN VIACOM AND BLOCKBUSTER AND OTHER RELATED PARTY TRANSACTIONS

   91

Relationships Between Viacom and Blockbuster

   91

Other Arrangements with Viacom and its Affiliates

   102

U.S. FEDERAL INCOME TAX CONSEQUENCES

   105

INTERESTS OF CERTAIN PERSONS

   107

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF VIACOM

   111

Security Ownership of Certain Beneficial Owners and Management of Viacom

   111

Change in Control Transactions

   115

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF BLOCKBUSTER AND TRANSACTIONS WITH MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

   116

Security Ownership of Certain Beneficial Owners and Management of Blockbuster

   116

Transactions with Management and Certain Beneficial Owners

   119

Change in Control Transactions

   119

DESCRIPTION OF CAPITAL STOCK OF BLOCKBUSTER

   120

General

   120

Common Stock

   120

Preferred Stock

   122

Limitation on Liability of Directors

   122

Anti-Takeover Provisions of Blockbuster’s Certificate of Incorporation and Bylaws; Delaware Law

   123

Transactions with Interested Parties

   126

Corporate Opportunities

   127

Transfer Agent and Registrar

   127

COMPARISON OF STOCKHOLDER RIGHTS

   128

DESCRIPTION OF OTHER MATERIAL AGREEMENTS

   134

New Blockbuster Credit Agreement

   134

SHARES ELIGIBLE FOR FUTURE SALE

   136

LEGAL MATTERS

   137

EXPERTS

   138

WHERE YOU CAN FIND MORE INFORMATION ABOUT VIACOM AND BLOCKBUSTER

   139

SCHEDULE I — DIRECTORS AND EXECUTIVE OFFICERS OF VIACOM

   141

ANNEX A — BLOCKBUSTER’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003

   A-1

ANNEX B — BLOCKBUSTER’S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004

   B-1

 

***********************************

 

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LETTER FROM BLOCKBUSTER CHAIRMAN & CEO JOHN ANTIOCO

 

 

To Viacom Stockholders—

 

As you consider this exchange offer being made by Viacom, I want to take this opportunity to summarize my personal vision for Blockbuster. Whatever the competitive set—mass merchants, “rentailers,” game boutiques or online rental services—Blockbuster plans to set itself apart from the competition by offering movies and games to rent, buy or trade, new or used, pay-by-the-day, pay-by-the-month, take them for a night or for keeps, online or in-store. When we achieve this vision, I believe Blockbuster will be a multi-dimensional, highly differentiated and highly profitable home entertainment brand. We see the opportunity for the future growth of Blockbuster. We also see the challenges that face our company and our business, which we have discussed in the Prospectus-Offer to Exchange. As you consider Viacom’s exchange offer, please take the time to read and consider the entire Prospectus-Offer to Exchange.

 

Two years ago Blockbuster announced its new corporate mission statement: “to be a complete source for movies and games.” Since that time, we have come a long way in redefining BLOCKBUSTER® as a place where customers can not only rent movies and games, but also buy and trade them as well.

 

Given Blockbuster’s ongoing transformation from a “rentailing-only” company into a specialty retailer of home entertainment, we believe now is an appropriate time for us to separate from Viacom. Over the course of the past ten years, Viacom has been a supportive majority shareholder, but as Blockbuster has moved to participate on a broader scale in the home entertainment retailing marketplace, we have moved away from the core media business of Viacom.

 

Blockbuster and Viacom have different competitive strengths, different operating philosophies, and different strategies designed to achieve future growth. However, Blockbuster and Viacom are united in the belief that a split-off of Blockbuster from Viacom will enable each company, respectively, to better focus its managerial and financial resources.

 

A brief history of Blockbuster’s transformation

 

As a fully independent company, we are looking forward to accelerating our transformation into a specialty retailer of home entertainment. We began this transformation process in 2002 when we established Blockbuster in a much more significant way in the movie retailing business. At that time, we increased our retail movie inventory, merchandising presence and advertising, and implemented various retail sales promotions. It was all part of a plan to have customers notice that there was something new at Blockbuster, and notice they did. We were successful at establishing Blockbuster as a movie retailer, as well as a “rentailer.”

 

Our mission didn’t change in 2003. We continued to dedicate ourselves to becoming a complete source for movies and games, and to accomplishing this transformation more profitably by improving gross margins, reducing low-profit transactions, reducing advertising expenditures and refining marketing programs to give us a better return on investment. This focus on profitability played a central role in our efforts to transform Blockbuster because the steady operating cash flow from our core rental business has provided us with the ability to invest in new initiatives that should enable us to evolve into a complete source for movies and games. Specifically, these new initiatives are rental subscription programs (both in-store and online), movie and game trading, and store-in-store games concepts.

 

We believe our new initiatives will enable us to take advantage of major emerging trends in home entertainment, and throughout the remainder of this year we intend to invest heavily in these initiatives. However, we are realistic about the start-up expenses required for new businesses, and we also understand that some of our new initiatives are at the beginning of what we believe is their potential growth curve. As a result of our investment spending, in combination with the continued weakness in the rental industry, profits for this year and next will be negatively impacted.

 

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However, although these investments in our business will result in short-term sacrifices, we believe the steps we are taking should drive future revenues and are in the long-term interests of our stockholders, our employees and our company.

 

The market dynamics of home video have changed—presenting Blockbuster with challenges and opportunities

 

We recognize that the video rental market has contracted as a result of the format change from VHS to DVD and the resulting elimination of the exclusive “rental window.” Some customers are buying movies instead of renting now that they have a choice to buy retail priced DVDs, and that dynamic should continue to provide challenges both for Blockbuster and the rest of the movie rental industry. However, the market shift to DVD, with lower wholesale pricing than was historically available for VHS movies, has also presented us with opportunities. Due in part to the shift from rental-priced VHS to retail-priced DVD, Blockbuster’s rental gross margin significantly improved last year, producing a sizeable gain in gross profit dollars as evidenced by an increase in our consolidated gross profit dollars of almost 10% year-over-year in 2003.

 

Additionally, the lower initial wholesale pricing of DVD titles has enabled us to offer copy depth to our customers at higher margins without many of the restrictions of our old VHS revenue-sharing agreements. Furthermore, greater copy depth has caused the market for used DVDs to grow significantly, which we believe represents a significant opportunity for Blockbuster. Additionally, retail-priced DVD has led to the creation of the subscription rental business, both in-store and online, and, with so many consumers building movie home libraries as a result of retail-priced DVD, Blockbuster is now able to enter the movie trading business as well.

 

In addition to all these benefits, there is still one more. The success of DVD, and the huge and growing profits generated by this digital format for the Hollywood studios, appear to have solidified the studios’ window sequencing order as it relates to our video rental business. In other words, because the sale and rental of DVD represent the studios’ largest revenue stream, we believe that the studios for now will continue to release movies to retail home video before they are available on video on demand (VOD). This should reduce any threat that VOD could pose to our business.

 

So while changes in the marketplace have presented challenges, we believe these same changes also have created opportunities to grow our business in the future.

 

Our core movie rental business—an opportunity to grow by increasing market share

 

In 2003, the U.S. video rental industry generated more than $8 billion in revenues and, while admittedly retail-priced DVD has negatively impacted the rental channel, the rental category should continue to generate billions of dollars in revenues for the foreseeable future according to even conservative industry analyst estimates.

 

Our plan going forward is to capture a larger share of the domestic rental market and drive more rental customers into our stores through a combination of marketing, promotion, and new rental offerings. As a result, we intend to be able to expose a growing number of customers to our expanding number of new offerings with the goal of increasing the size and number of our transactions and, eventually, our profitability.

 

To accomplish all of this, we intend to reinvent the way people rent home entertainment, and we intend to do this through our rental subscription programs—both in-store and online.

 

In late May of this year, we began offering on a national basis the BLOCKBUSTER MOVIE PASS, our store-based movie subscription program that we have been testing in multiple markets since the summer of 2002. For a flat monthly fee, the movie pass allows customers to rent an unlimited number of movies, two or three at a time, without return dates or extended viewing fees for as long as they subscribe to the pass. We see the movie

 

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pass as a key means of increasing our rental traffic in a tough rental market. Our goal is to have 8% of our active monthly members on the service by the end of this year and 10% of our active monthly members paying us a monthly fee by the end of 2005.

 

As for renting movies online, we see this as a sizable opportunity that can contribute to our long-term profitability. As a defensive strategy, we don’t want customers, who are interested in renting online, going anywhere else for their movies. As an offensive move, we think online rentals could represent new customers for us because many potential subscribers live outside the proximity of a BLOCKBUSTER store.

 

To begin serving these potential online customers, we launched an online rental service in the United Kingdom in mid-May, and our goal is to have an online rental offering available in the United States later this year. Our plan is to utilize the full power of our globally recognized brand, our marketing ability, our rich customer database and the promotional opportunities afforded by our store network to gain as many subscribers as possible. We see no reason why we can’t have a substantial share of the online rental transactions by the end of next year. We are also proceeding with our plans to merge our U.S. in-store and online subscription programs in 2005. This integrated approach should give our customers the best of both worlds—the ability to rent or return movies by mail or at their local BLOCKBUSTER store.

 

The movie trading business—a new growth opportunity

 

Another opportunity we are aggressively pursuing and plan to have in place in 2004 is movie trading. We believe movie trading at Blockbuster could someday represent a significant source of incremental revenues. Many of the DVDs purchased in the United States last year were previously viewed, and Blockbuster is already the nation’s largest retailer of used DVDs. We believe that our customers, who are already accustomed to buying previously rented DVDs from us, will be interested in selling and buying previously owned DVDs at Blockbuster as well.

 

According to our internal estimates, there are almost two billion DVDs in home video libraries across the United States. There are even more when you factor in international markets, and our research indicates that consumers would be interested in trading many of their DVD movies if they can get a fair value for them.

 

We first offered the concept of movie trading at our stores during the holiday season of 2003 with our Big DVD Trade-In promotion that gives customers the opportunity to trade in a used DVD and purchase a popular, new title for a reduced price. Also, we have been testing a more comprehensive trading model that enables customers to receive store credit for their used DVDs, which can be used for anything in our stores— movies, games or merchandise.

 

While our trading program is still in its early stages, we believe a strong demand for DVD trading will emerge as consumers learn that trading is a smart, economical way to refresh their movie libraries or monetize their collections. So movie trading is one more benefit we can offer our customers, one more way we can leverage our existing store locations and store traffic and one more way we can differentiate Blockbuster from traditional retailers.

 

Our plan is to have movie and game trading available in more than 2,000 of our domestic stores and all of our 700-plus UK stores by the end of 2004.

 

Games store-in-store concepts—another initiative for the future

 

We also expect to grow our games business by continuing to develop our games store-in-store concepts.

 

In the United Kingdom, our GAMESTATION® chain continues to perform extremely well. As of March 31, 2004, we had a total of 153 GAMESTATION locations, both freestanding and store-in-stores, an addition of 89 locations in the 17 months since we purchased the chain in late 2002.

 

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As for the United States, by the end of this summer we intend to open an additional 300 games store-in-stores under our GAME RUSH logo for a total of 450 domestic games store-in-stores opened in less than one year. In addition, we intend to open approximately 50 new GAME RUSH locations outside of the United States. These GAME RUSH locations offer game rental, retail and trading all within the convenience of a Blockbuster store. By operating GAME RUSH as a store-in-store concept, we believe we will be able to maximize our operating efficiencies by having dedicated game staff during peak hours and utilizing employees from our movie rental operations during slower times. Additionally, we are able to install the GAME RUSH concept quickly with minimal store disruption for a relatively modest investment.

 

Going forward, we think that about half of our domestic stores, as well as many of our international locations, could accommodate the GAME RUSH concept, and we plan to have 1,000 games store-in-stores operating by the end of 2005.

 

As with our other initiatives, we intend to be a very aggressive competitor with GAME RUSH. This concept offers us an incremental revenue stream with no additional real estate costs and brings us the opportunity to generate increased customer traffic for the entire store. So once we have established critical mass, we plan to broadly communicate that GAME RUSH is absolutely the best place to buy, rent or trade video games.

 

Service, store-growth, systems-development & diversity—more emphasis going forward

 

Another initiative designed to differentiate Blockbuster in the marketplace is our continued emphasis on superior service. We believe this emphasis on service, when combined with our array of retail-rental movie and game offerings, will set us apart from other retailers and position Blockbuster as a one-of-a-kind specialty home entertainment retailer. We are now into our second year of implementing initiatives designed to improve customer service at our stores both in the United States and around the world. These initiatives are designed to enable us to eliminate non-value added store activities through better processes and improve service by giving our employees more time to interact with customers. This emphasis on customer service is a critical part of our plan to differentiate ourselves in the marketplace as a specialty retailer of movies and games.

 

Still an additional undertaking for us in 2004 is the upgrading of our management information systems and infrastructure. We are putting a great deal of resources this year into developing and refining our systems, which will in turn support initiatives like our rental subscription and trading programs.

 

We will also continue to add new stores around the world, both corporate and franchised, and as a multi-national retailer, we remain committed to ensuring that our workforce, supplier base and product offerings reflect the diverse populations we serve.

 

In Summary

 

The home entertainment market has changed in the past few years, largely due to the emergence of retail-priced DVD, the resulting competition from mass merchants and the increasing availability of other entertainment options. These changes have presented Blockbuster with challenges; however, they have also presented us with new opportunities, including rental subscription programs, online and in-store, movie and game trading, and games store-in-stores, which have the potential to contribute significantly to our operating profits.

 

All of these initiatives require financial investment. Investment in new information technology systems, store facilities, new processes to ensure employee productivity, marketing, incentives for store personnel, aggressive promotions, and much more. These initiatives also require investments of people resources and a lot of hard work. In short, our transformation will not be easy.

 

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I believe we are up to the challenge and that we will be better equipped to achieve our goals as an independent, stand-alone company rather than as a subsidiary of Viacom. Blockbuster is a great brand and a great retailing concept. We have almost 9,000 stores worldwide. We have a plan in place that should allow us to grow our business, and I believe we have the management team, the employees and the franchisees that will enable us to transform Blockbuster into the complete source for movies and games.

 

Sincerely,

 

JOHN ANTIOCO

 

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QUESTIONS AND ANSWERS ABOUT THIS EXCHANGE OFFER

 

Q: Why has Viacom decided to separate Blockbuster from Viacom?

 

A: Viacom’s board of directors has authorized the divestiture of its approximately 81.5% interest in Blockbuster. As a result of the divestiture, Blockbuster will be an independent entity. Each company believes that the separation of Blockbuster from Viacom will provide numerous corporate benefits to itself and the other company, the most important of which are listed below.

 

  Facilitate Viacom’s and Blockbuster’s Respective Expansion and Growth. Viacom and Blockbuster have significantly different competitive strengths and operating strategies, and each company believes that the separation of Blockbuster from Viacom, which is referred to in this Prospectus-Offer to Exchange as the “split-off,” will strengthen its ability to focus its managerial and financial resources on developing and growing its core businesses. Viacom is a diversified, broad-based media business, and desires to emphasize capital investment opportunities in its core businesses, rather than investing capital in initiatives that would enhance Blockbuster’s growth. Blockbuster is in the rental and retail home video and game industry and shares many more characteristics with other retailers than with Viacom’s other businesses. Blockbuster has a number of strategic initiatives that it is currently pursuing in response to industry changes. For example, Blockbuster has plans to expand its rental subscription programs and to continue to develop its games store-in-store concepts and its movie and games trading model. Execution of these initiatives will move Blockbuster’s business further away from Viacom’s areas of strategic focus.

 

  Resolve Appearance of Competitive Conflicts Involving Blockbuster and Paramount Pictures. Paramount Pictures Corporation, a Viacom subsidiary, is in the motion picture business and competes with other movie studios. As a result, Blockbuster believes that the other movie studios, which supply Blockbuster with its movies, consider Blockbuster’s affiliation with Paramount Pictures to be a conflict of interest. Similarly, because Paramount Pictures supplies movies to Blockbuster’s competitors in the video rental market, Viacom believes that Blockbuster’s competitors, who are customers of Paramount Pictures, view Paramount Pictures as having a conflict of interest. The split-off should eliminate these perceived competitive conflicts.

 

  Facilitate Investment Decisions by Stockholders. Following the split-off, it will be easier for potential investors to assess Viacom and Blockbuster on an independent basis and choose the company in which to invest and in what relative percentages. The split-off is expected to enable Viacom stockholders who currently own an indirect interest in Blockbuster through Viacom to convert their investment to a direct ownership of Blockbuster in a tax-efficient manner.

 

Q: Why did Viacom choose this exchange offer as the way to separate Blockbuster from Viacom?

 

A: Viacom believes this exchange offer is a tax-efficient way to achieve the goals outlined in response to the first question above. It also is expected to allow you, as a Viacom stockholder, to adjust your investment between Viacom and Blockbuster on a tax-free basis, except with respect to any cash you receive in lieu of fractional shares of Blockbuster class A and class B common stock. This exchange offer also is intended to be tax-free to Viacom.

 

Q: How will the relationship between Blockbuster and Viacom change after this exchange offer is completed?

 

A:

The split-off is intended to establish Blockbuster as an independent entity. Consequently, after this exchange offer, because Viacom will no longer own a controlling interest in Blockbuster, Blockbuster’s board of directors and management will be free to pursue initiatives that they believe are in Blockbuster’s best

 

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interest without requiring these initiatives to be consistent with Viacom’s view of the best interests of Blockbuster or Viacom. In addition, after this exchange offer, Blockbuster will provide all of its own management, financial, tax, accounting, legal and other resources, some of which were previously provided by Viacom. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Transition Services Agreement” on page 99. In addition, all of the Blockbuster directors who are also directors or officers of Viacom will resign from Blockbuster’s board of directors.

 

Q: Will the split-off have a financial impact on Blockbuster as an independent company?

 

A: Following the split-off, Blockbuster anticipates that the renegotiation of services or contracts currently provided by Viacom will result in increased operating expenses. In addition, prior to the commencement of this exchange offer, on [            ], 2004, Blockbuster paid a pro rata special cash distribution of $5.00 per share (approximately $905 million in the aggregate) to its stockholders, which is referred to in this Prospectus-Offer to Exchange as the “special distribution.” As a Viacom stockholder, you were not entitled to receive the special distribution, unless, as of the record date for the special distribution, you also directly held shares of Blockbuster common stock. To fund the payment of this special distribution and finance transaction costs and expenses in connection with the split-off and the special distribution, on [                ], 2004, Blockbuster incurred $950 million of additional indebtedness, which will result in increased interest expense as well as customary restrictions regarding matters such as dividends, capital expenditures and the ability to incur additional indebtedness. See the sections entitled “Market Prices and Dividend Information—Shares of Blockbuster Class A and Class B Common Stock and Dividends” and “Description of Other Material Agreements—New Blockbuster Credit Agreement” beginning on pages 72 and 134, respectively.

 

Q: May I participate in this exchange offer?

 

A: Any holder of Viacom class A or class B common stock, including Viacom class A or class B common stock that is held through a Viacom or Blockbuster employee benefit plan, may participate in this exchange offer. However, you will not be eligible to tender in this exchange offer any of the shares allocated to your employer matching contribution account in the Viacom 401(k) Plan, the Infinity Broadcasting Corporation Union Employees’ 401(k) Plan or the Viacom Employee Savings Plan if your employer matching contribution account is not 100% vested as of [            ], 2004.

 

Q: How many shares of Blockbuster class A and class B common stock will I receive for each share of Viacom class A or class B common stock that I tender?

 

A: Subject to the proration procedures described below, you will receive [            ] shares of Blockbuster class A common stock and [            ] shares of Blockbuster class B common stock for each share of Viacom common stock that you tender and do not withdraw in this exchange offer, regardless of whether you tender shares of Viacom class A or class B common stock. This relationship between the number of shares of Blockbuster class A and class B common stock you will receive in exchange for each share of Viacom common stock you tender is referred to in this Prospectus-Offer to Exchange as the “exchange ratio.” Fractional shares of Blockbuster class A and class B common stock will not be issued in this exchange offer; instead you will receive cash in lieu of fractional shares. The exchange agent, acting as agent for the Viacom stockholders otherwise entitled to receive fractional shares of Blockbuster class A and class B common stock, will aggregate all fractional shares and cause them to be sold in the open market for the accounts of these stockholders.

 

For example, if you tender either 100 shares of Viacom class A common stock or 100 shares of Viacom class B common stock, you will receive [            ] shares of Blockbuster class A common stock, [            ] shares of Blockbuster class B common stock and cash in lieu of [            ] of a share of Blockbuster class A common stock and [            ] of a share of Blockbuster class B common stock.

 

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Q: What is the aggregate number of shares of Blockbuster class A and class B common stock being offered in this exchange offer?

 

A: Viacom is offering an aggregate of [            ] shares of Blockbuster class A common stock and [            ] shares of Blockbuster class B common stock, such that following the completion of this exchange offer, the aggregate outstanding Blockbuster common stock will consist of approximately 60% Blockbuster class A common stock and approximately 40% Blockbuster class B common stock. As of the date of this Prospectus-Offer to Exchange, Viacom owns 144 million shares of Blockbuster class B common stock, representing all of the outstanding shares of Blockbuster class B common stock. Prior to the completion of this exchange offer, Viacom will convert [            ] shares of Blockbuster class B common stock, on a one-for-one basis, into shares of Blockbuster class A common stock. These shares of Blockbuster class A common stock are referred to in this Prospectus-Offer to Exchange as “converted class A common stock.” In this exchange offer, Viacom is offering all of its shares of Blockbuster class B common stock and converted class A common stock.

 

Q: Why is Viacom converting some of its Blockbuster class B common stock to Blockbuster class A common stock and offering both in this exchange offer?

 

A: Viacom has agreed to convert [            ] shares of Blockbuster class B common stock on a one-for-one basis into Blockbuster class A common stock and offer both classes of stock in this exchange offer. As discussed below, Blockbuster’s amended and restated certificate of incorporation, which is referred to in this Prospectus-Offer to Exchange as “Blockbuster’s certificate of incorporation,” will be amended upon Viacom’s acceptance for exchange of shares of Viacom class A and class B common stock pursuant to this exchange offer. These amendments will provide, among other things, that after completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share. Viacom has agreed to convert these shares and to support the change in the voting rights of the Blockbuster class B common stock as the result of arm’s length negotiations with a special committee of Blockbuster’s board of directors comprised of directors who are independent of Viacom and Blockbuster, which is referred to in this Prospectus-Offer to Exchange as the “Blockbuster special committee.” The Blockbuster special committee believes that an equity capitalization of Blockbuster following the completion of this exchange offer that consists of approximately 60% Blockbuster class A common stock and approximately 40% Blockbuster class B common stock will enhance the liquidity of the Blockbuster class A common stock. Viacom’s conversion of Blockbuster class B common stock to Blockbuster class A common stock is governed by the amended and restated initial public offering and split-off agreement, which is referred to in this Prospectus-Offer to Exchange as the “IPO agreement.” See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91.

 

Q: Will I receive a premium for my Viacom shares?

 

A:

Shares of Blockbuster class A common stock are traded on the New York Stock Exchange. On [        ], 2004, the last New York Stock Exchange trading day before the date of this Prospectus-Offer to Exchange, the closing price for the Blockbuster class A common stock was $[        ]. There is currently no trading market for Blockbuster class B common stock, and neither Viacom nor Blockbuster can assure you that one will develop or be sustained after this exchange offer. In addition, neither Viacom nor Blockbuster can predict the prices at which Blockbuster class A or

 

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class B common stock will trade after this exchange offer. Shares of Viacom class A and class B common stock are traded on the New York Stock Exchange. On [        ], 2004, the last New York Stock Exchange trading day before the date of this Prospectus-Offer to Exchange, the closing price for the Viacom class A and class B common stock was $[        ] and $[        ], respectively. Whether Viacom stockholders participating in this exchange offer will receive a premium for their shares of Viacom common stock will depend on the prices for shares of Viacom class A or class B common stock and Blockbuster class A common stock at the expiration date of this exchange offer. Since the market prices of shares of Viacom class A and class B common stock and Blockbuster class A common stock fluctuate, Viacom cannot predict the prices at which shares of Viacom class A or class B common stock and Blockbuster class A common stock will be trading at the expiration date of this exchange offer, and, therefore, cannot predict whether stockholders who participate in this exchange offer will receive a premium for their shares of Viacom class A or class B common stock, or, if they do, the amount of such premium.

 

Q: Are there any conditions to Viacom’s obligation to complete this exchange offer?

 

A: Yes. Viacom is not required to complete this exchange offer unless the conditions beginning on page 64 are satisfied or waived prior to the expiration of this exchange offer. For example, Viacom is not required to complete this exchange offer unless at least [        ] shares of Viacom class A and class B common stock are tendered so that Viacom can exchange at least 60% of the shares of Blockbuster class B common stock and converted class A common stock that Viacom owns. The minimum number of shares of Viacom class A and class B common stock that must be tendered is referred to in this Prospectus-Offer to Exchange as the “minimum amount.” Viacom may waive any or all of the conditions to this exchange offer, including the requirement that the minimum amount of shares of Viacom class A and class B common stock be tendered. Blockbuster has no right to waive any of the conditions to this exchange offer. However, Viacom has certain contractual obligations with Blockbuster with respect to the disposition of its Blockbuster class B common stock and converted class A common stock even if the minimum amount condition has not been satisfied, as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transaction—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91.

 

Q: What happens if more than the minimum amount of shares of Viacom common stock is tendered, but not enough are tendered to allow Viacom to exchange all of the shares of Blockbuster class B common stock and converted class A common stock it owns?

 

A: In this case, as soon as practicable following the completion of this exchange offer, Viacom will distribute in a spin-off to its stockholders its remaining shares of Blockbuster class B common stock and converted class A common stock (if any), except that once Viacom has so distributed more than 80% of the total voting power of Blockbuster in the aggregate in this exchange offer and any spin-off, Viacom may elect not to distribute its remaining shares in a spin-off, so long as such election would not result in an increase in the number of votes per share of Blockbuster class B common stock as compared to the number of votes each share of Blockbuster class B common stock would have had if such shares had been included in any spin-off, in each case after giving effect to the adjustment described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. This spin-off is referred to in this Prospectus-Offer to Exchange as the “spin-off.”

 

Q: What happens if more than [            ] shares of Viacom common stock are tendered?

 

A:

If more than [            ] shares of Viacom common stock are tendered in the aggregate, all shares of Viacom common stock that are properly tendered will be accepted for exchange on a pro rata basis in proportion to the number of shares tendered. This is referred to in this Prospectus-Offer to Exchange as “proration.” An exception to proration is that stockholders who beneficially own “odd-lots,” that is, fewer

 

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than 100 shares of either class of Viacom common stock, may elect that such odd-lot of Viacom class A or class B common stock not be subject to proration. For instance, if you beneficially own 100 shares of Viacom class A common stock and 50 shares of Viacom class B common stock, you may only elect that your “odd-lot” of 50 shares of Viacom class B common stock not be subject to proration. Proration for each tendering stockholder will be based on the number of shares of Viacom class A or class B common stock tendered by that stockholder in this exchange offer, and not on that stockholder’s aggregate ownership of Viacom. Any shares of Viacom common stock not accepted for exchange as a result of proration will be returned to tendering stockholders in certificated form. Viacom will announce its preliminary determination of the extent to which tenders will be prorated by press release by 9:00 a.m., New York City time, on the business day following the expiration of this exchange offer. This determination is referred to in this Prospectus-Offer to Exchange as the “preliminary proration factor.” Viacom will announce its final determination of the extent to which tenders will be prorated by press release promptly after this determination is made. This determination is referred to in this Prospectus-Offer to Exchange as the “final proration factor.”

 

Q: When does this exchange offer expire?

 

A: The period during which you are permitted to tender your shares of Viacom class A or class B common stock in this exchange offer will expire at 12:00 midnight, New York City time, on [            ], 2004, unless Viacom extends the expiration of this exchange offer. If you hold shares of Viacom class A or class B common stock through a Viacom or Blockbuster employee benefit plan, you may have an earlier deadline for directing the trustees of these plans to tender shares held in your plan account. Please refer to the instructions to tender that will be sent to you separately by the trustees or administrators of these plans. You must tender your shares prior to the expiration of this exchange offer (or such earlier date as communicated to you by the trustees or administrators of the employee benefit plans) if you wish to participate. Viacom also may terminate this exchange offer in the circumstances described in the section entitled “The Exchange Offer—Extension; Termination; Amendment” beginning on page 63.

 

Q: Can this exchange offer be extended, and under what circumstances?

 

A: Yes. Viacom can extend this exchange offer at any time, in its sole discretion, and regardless of whether any condition to this exchange offer has been satisfied or waived. If Viacom extends this exchange offer, it will publicly announce by press release the extension no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

 

Q: How many shares of Viacom common stock will be acquired by Viacom if this exchange offer is completed?

 

A: The number of shares of Viacom common stock that will be accepted if this exchange offer is completed is between [            ] shares, which is the minimum amount, and [            ] shares.

 

  The minimum amount of Viacom class A and class B common stock that Viacom has indicated it would acquire in this exchange offer is [            ] shares, or [    ]%, of Viacom common stock outstanding as of [            ], 2004. If Viacom acquires this minimum amount, it will exchange [            ] shares, or [    ]%, of Blockbuster class B common stock and [            ] shares, or [    ]%, of the converted class A common stock.

 

  The maximum amount of Viacom class A and class B common stock that Viacom could acquire in this exchange offer is [            ] shares, or [    ]%, of Viacom common stock outstanding as of [            ], 2004. If Viacom acquires this maximum amount, it will exchange all of the Blockbuster class B common stock and converted class A common stock that it owns.

 

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Q: Does Viacom own any shares of Blockbuster class A common stock other than the converted class A common stock?

 

A: Yes. In addition to the converted class A common stock, Viacom owns approximately 3.6 million shares, or approximately 9.7%, of Blockbuster class A common stock outstanding as of May 21, 2004, which Viacom previously purchased in the open market in order to maintain U.S. federal income tax consolidation with Blockbuster. Viacom intends to dispose of all of these shares prior to the completion of this exchange offer by contributing these shares of Blockbuster class A common stock to the Viacom Pension Plan and the CBS Combined Pension Plan. Pursuant to an amended and restated registration rights agreement between Blockbuster and Viacom, which is referred to in this Prospectus-Offer to Exchange as the “registration rights agreement,” Blockbuster has filed a shelf registration statement on Form S-3 in order to facilitate the public resale of these shares by the Viacom Pension Plan and the CBS Combined Pension Plan.

 

Q: Is National Amusements, Inc. participating in this exchange offer?

 

A: No. National Amusements, Inc., the controlling stockholder of Viacom, will not participate in this exchange offer. National Amusements, Inc. is referred to in this Prospectus-Offer to Exchange as “National Amusements.” As of May 21, 2004, National Amusements beneficially owned shares of Viacom class A common stock representing approximately 71% of the voting power of all classes of Viacom stock, and approximately 11% of Viacom class A and class B common stock on a combined basis. The decision not to participate is consistent with the fact that National Amusements has never sold or otherwise disposed of any of its holdings in Viacom. Mr. Sumner M. Redstone, the controlling stockholder of National Amusements and the chairman of the board of directors and chief executive officer of Viacom, is committed to focusing his managerial and financial resources on developing and growing the core businesses of Viacom.
Q: How do I decide whether to participate in this exchange offer?

 

A: Whether you should participate in this exchange offer depends on many factors. You should examine carefully your specific financial position, plans and needs before you decide whether to participate. Viacom encourages you to consider, among other things:

 

  your view of the relative values of a single share of Viacom class A or class B common stock and the shares of Blockbuster class A and class B common stock you will receive in this exchange offer; and

 

  your individual investment strategy with regard to these stocks.

 

In addition, you should consider all of the factors described in the section entitled “Risk Factors” beginning on page 30. None of Viacom, Blockbuster, or any of their respective directors or officers or the co-dealer managers makes any recommendation as to whether you should tender your shares of Viacom class A or class B common stock. You must make your own decision after carefully reading this

document and consulting with your advisors based on your own financial position and requirements. It is strongly encouraged that you read this document very carefully.

 

Q: How do I participate in this exchange offer?

 

A: The procedures you must follow to participate in this exchange offer will depend on whether you hold your shares of Viacom class A or class B common stock in certificated form, through a bank or broker or through a Viacom or Blockbuster employee benefit plan. For specific instructions about how to participate, see the section entitled “The Exchange Offer—Procedures for Tendering” beginning on page 58.

 

Q: If I hold shares as a participant in a Viacom or Blockbuster employee benefit plan eligible to participate in this exchange offer, how do I participate?

 

A:

If you hold Viacom class A or class B common stock as a participant in a Viacom or

 

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Blockbuster employee benefit plan, you should follow the instructions sent to you separately by the plan trustees or administrators. You should not use the letter of transmittal to direct the tender of Viacom class A or class B common stock held in any such employee benefit plans. Instead, you may direct the plan trustee to tender none, some or all of the Viacom class A or class B common stock in your employee benefit plan account. However, you will not be eligible to tender in this exchange offer any of the shares allocated to your employer matching contribution account in the Viacom 401(k) Plan, the Infinity Broadcasting Corporation Union Employees’ 401(k) Plan or the Viacom Employee Savings Plan if your employer matching contribution account is not 100% vested as of [            ], 2004. See the section entitled “The Exchange Offer—Procedures for Tendering” beginning on page 58 for a list of the Viacom and Blockbuster employee benefit plans eligible to participate in this exchange offer and for specific instructions on how to participate.

 

Q: Can I tender only a portion of my Viacom class A or class B common stock in this exchange offer?

 

A: Yes. You may tender some, all or none of your Viacom class A or class B common stock.

 

Q: What do I do if I want to retain all of my Viacom class A or class B common stock?

 

A: If you want to retain all of your Viacom class A or class B common stock, you do not need to take any action.

 

Q: Can I change my mind after I tender my Viacom class A or class B common stock?

 

A: Yes. You may withdraw your tendered shares at any time before this exchange offer expires. See the section entitled “The Exchange Offer—Withdrawal Rights” beginning on page 62. If you change your mind again, you can re-tender your Viacom class A or class B common stock by following the tender procedures again prior to the expiration of this exchange offer.
Q: How soon can I expect delivery of my Blockbuster class A and class B common stock?

 

A: Shares of Blockbuster class A and class B common stock will be delivered by book-entry transfer as soon as practicable after acceptance of shares of Viacom common stock in this exchange offer and determination of the final proration factor, if any. See the section entitled “The Exchange Offer—Book-Entry Accounts” on page 63.

 

Q: Will the Blockbuster class B common stock be listed on an exchange following the completion of this exchange offer?

 

A: Yes. Blockbuster expects that following the completion of this exchange offer, the shares of Blockbuster class B common stock will be listed on the New York Stock Exchange under the symbol “[    ].” Blockbuster intends to apply for listing of shares of Blockbuster class B common stock following the initial filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part.

 

Q: Why is Blockbuster amending its organizational documents?

 

A:

Following the recommendation of Blockbuster’s board of directors, Blockbuster’s stockholders approved certain amendments to Blockbuster’s certificate of incorporation at Blockbuster’s 2004 annual meeting. These amendments will be filed and become effective immediately after Viacom’s acceptance for exchange of shares of Viacom class A and class B common stock pursuant to this exchange offer. These amendments provide, among other things, that after completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and

 

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Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share. In addition, the amendments remove provisions relating to Viacom as a stockholder of Blockbuster and add other provisions that Blockbuster’s board of directors believes are advisable for a publicly traded company without a controlling stockholder. These amendments are referred to in this Prospectus-Offer to Exchange as the “Blockbuster charter amendments.”

 

Blockbuster’s board of directors is also amending its bylaws to remove the provisions relating to Viacom as a stockholder of Blockbuster and to add other provisions that Blockbuster’s board of directors believes are advisable for a publicly traded company without a controlling stockholder. For a more complete description of the Blockbuster charter amendments and the amendments to Blockbuster’s bylaws, see the sections entitled “Description of Capital Stock of Blockbuster” and “Comparison of Stockholder Rights” beginning on pages 120 and 128, respectively.

 

Q: Will the Blockbuster class B common stock be convertible into Blockbuster class A common stock following the completion of this exchange offer?

 

A: No. Following the effectiveness of the Blockbuster charter amendments, shares of Blockbuster class B common stock will not be convertible into shares of Blockbuster class A common stock. See the section entitled “Description of Capital Stock of Blockbuster” beginning on page 120.

 

Q: Do the shares of Blockbuster class A and class B common stock have different voting rights?

 

A: Yes. Holders of shares of Blockbuster class A common stock are entitled to one vote per share. Shares of Blockbuster class B common stock are currently entitled to five votes per share, and after completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share. Also, see the sections entitled “Description of Capital Stock of Blockbuster,” and “Comparison of Stockholder Rights” beginning on pages 120 and 128, respectively.

 

Q: Will I be taxed on the shares of Blockbuster common stock that I receive in this exchange offer?

 

A: No, except with respect to cash paid in lieu of fractional shares of Blockbuster class A and class B common stock. Viacom will receive a tax opinion from Cravath, Swaine & Moore LLP to the effect that, for U.S. federal income tax purposes, this exchange offer and, if applicable, the spin-off will be tax-free to Viacom and its stockholders, except with respect to any cash received in lieu of fractional shares of Blockbuster class A and class B common stock. This opinion will not address state, local or foreign tax consequences of this exchange offer which may be applicable to Viacom and its stockholders. You should consult your tax advisor as to the particular tax consequences to you of this exchange offer. See the sections entitled “Risk Factors—Risk Factors Relating to this Exchange Offer—If this Exchange Offer and Any Spin-Off Are Determined to Be Taxable, Viacom and Tendering Stockholders Could Be Subject to a Material Amount of Taxes” and “U.S. Federal Income Tax Consequences” beginning on pages 47 and 105, respectively.

 

Q: Are there any appraisal rights for holders of Viacom stock or Blockbuster stock?

 

A: There are no appraisal rights available to Viacom stockholders or Blockbuster stockholders in connection with this exchange offer.

 

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Q: Where can I find out more information about Viacom and Blockbuster?

 

A: You can find out more information about Viacom and Blockbuster from various sources described in the section entitled “Where You Can Find More Information About Viacom and Blockbuster” beginning on page 139.

 

Q: Who should I call if I have questions about this exchange offer or want copies of additional documents?

 

A: You may call the information agent, [            ], at [            ] (toll-free) in the United States, or [            ] (collect) elsewhere, to ask any questions about this exchange offer or to request additional documents, including copies of this document.

 

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SUMMARY

 

As used in this document, unless the context requires otherwise, (1) references to Viacom include Viacom Inc. and its consolidated subsidiaries and (2) references to Blockbuster include Blockbuster Inc. and its consolidated subsidiaries. Unless the context otherwise indicates, Viacom has assumed throughout this document that this exchange offer is fully subscribed and that all shares of Blockbuster class B common stock and converted class A common stock held by Viacom are distributed through this exchange offer. This brief summary does not contain all of the information that should be important to you. You should carefully read this entire document and the other documents to which this document refers to fully understand this exchange offer. See the section entitled “Where You Can Find More Information About Viacom and Blockbuster” beginning on page 139.

 

THE COMPANIES

 

Viacom Inc.

1515 Broadway

New York, New York 10036

(212) 258-6000

www.viacom.com

 

Viacom is a diversified worldwide entertainment company with operations in the following segments:

 

  Cable Networks: The cable networks segment consists of MTV MUSIC TELEVISION®, SHOWTIME®, NICKELODEON®/NICK AT NITE®, VH1®, MTV2 MUSIC TELEVISION, TV LAND®, SPIKE TV, CMT®: COUNTRY MUSIC TELEVISION, COMEDY CENTRAL®, the BET CABLE NETWORK and BET JAZZ THE JAZZ CHANNEL, among other program services.

 

  Television: The television segment consists of the CBS® and UPN® television networks, Viacom’s 39 owned broadcast television stations and its television production and syndication business, including KING WORLD® and PARAMOUNT TELEVISION.

 

  Radio: The radio segment owns and operates 185 radio stations through INFINITY RADIO®.

 

  Outdoor: The outdoor segment through VIACOM OUTDOOR displays advertising on media, including billboards, transit shelters, buses, rail systems (in-car, station platforms and terminals), mall kiosks and stadium signage.

 

  Entertainment: The entertainment segment includes PARAMOUNT PICTURES®, which produces and distributes theatrical motion pictures; SIMON & SCHUSTER®, which publishes and distributes consumer books under imprints such as SIMON & SCHUSTER, POCKET BOOKS®, SCRIBNER® and THE FREE PRESS; PARAMOUNT PARKS®, which is principally engaged in the ownership and operation of five theme parks and a themed attraction in the United States and Canada; and movie theater and music publishing operations.

 

  Video: The video segment consists of an approximately 81.5% equity interest in Blockbuster, which operates and franchises BLOCKBUSTER® video and other branded stores worldwide.

 

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Blockbuster Inc.

1201 Elm Street

Dallas, Texas 75270

(214) 854-3000

www.blockbuster.com

 

Blockbuster is a leading global provider of in-home rental and retail movie and game entertainment, with approximately 8,900 stores in the United States, its territories and 25 other countries as of March 31, 2004. As of that date, Blockbuster operated approximately 7,100 of the stores, and its franchisees operated approximately 1,800 of the stores. In addition to operating stores under the BLOCKBUSTER® and BLOCKBUSTER VIDEO® brands, Blockbuster operates stores under other brands, such as XTRA-VISION® and MR. MOVIES®. Blockbuster’s specialty stores, or store-in-store concepts, use brands such as GAME RUSH, GAMESTATION®, MOVIE TRADING CO.®, and RHINO VIDEO GAMES®. See Blockbuster’s Annual Report on Form 10-K for the year ended December 31, 2003 and Blockbuster’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which reports are included in this Prospectus-Offer to Exchange as Annex A and Annex B, respectively.

 

THE EXCHANGE OFFER

 

Terms of this Exchange Offer (page 56)

 

Viacom is offering its stockholders the opportunity to exchange each of their shares of Viacom class A or class B common stock for [            ] shares of Blockbuster class A common stock and [            ] shares of Blockbuster class B common stock. Following the completion of this exchange offer, the aggregate outstanding Blockbuster common stock will consist of approximately 60% Blockbuster class A common stock and approximately 40% Blockbuster class B common stock. You may tender all, some or none of your shares of Viacom class A or class B common stock.

 

Viacom class A and class B common stock properly tendered and not withdrawn will be accepted for exchange at the exchange ratio, on the terms and conditions of this exchange offer and subject to the limitations described below, including the proration provisions. Viacom will promptly return to Viacom stockholders any shares of Viacom class A or class B common stock that are not accepted for exchange following the expiration of this exchange offer and the determination of the final proration factor, if any, described below.

 

Extension; Termination; Amendment (page 63)

 

This exchange offer, and your withdrawal rights, will expire at 12:00 midnight, New York City time, on [            ], 2004, unless Viacom decides to extend this exchange offer. You must tender your shares of Viacom class A or class B common stock prior to this time if you want to participate in this exchange offer. Viacom may extend, terminate or amend this exchange offer as described in this Prospectus-Offer to Exchange.

 

Conditions for Completion of this Exchange Offer (page 64)

 

This exchange offer is subject to various conditions, including that at least [            ] shares of Viacom class A and class B common stock are tendered so that Viacom may exchange at least 60% of the shares of Blockbuster class B common stock and converted class A common stock it holds. All conditions to the completion of this exchange offer must be satisfied or waived by Viacom prior to the expiration of this exchange offer.

 

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Proration; Odd-Lots (page 57)

 

If, on the expiration date of this exchange offer, more than [            ] shares of Viacom class A and class B common stock are tendered into this exchange offer, Viacom will accept on a pro rata basis all shares of Viacom class A and class B common stock validly tendered and not withdrawn. Viacom will announce the preliminary proration factor by press release on the first business day after the expiration date. Upon determining the number of shares of Viacom class A and class B common stock validly tendered for exchange, Viacom will announce the final results, including the final proration factor, if any, as promptly as practicable after the expiration date.

 

If you own fewer than 100 shares of either Viacom class A common stock or Viacom class B common stock and tender all of your shares of that class, you may request that your shares not be subject to proration by completing the box in the letter of transmittal, and, if applicable, on the notice of guaranteed delivery, entitled “Odd-Lot Shares.” If your odd-lot shares are held by a broker for your account, you can contact the broker and request this preferential treatment. All of your odd-lot shares will be accepted for exchange without proration if Viacom completes this exchange offer.

 

Fractional Shares (page 57)

 

Fractional shares of Blockbuster class A and class B common stock will not be issued in this exchange offer. The exchange agent, acting as agent for the tendering Viacom stockholders, will aggregate any fractional shares and cause them to be sold in the open market. You will receive the proceeds, if any, net of commissions, from the sale of these shares in accordance with your fractional interest.

 

Procedures for Tendering (page 58)

 

For you to validly tender your shares of Viacom class A or class B common stock pursuant to this exchange offer, prior to the expiration of this exchange offer:

 

  If you hold certificates for shares of Viacom class A or class B common stock, you must deliver to the exchange agent at the address listed on the back cover of this Prospectus-Offer to Exchange a properly completed and duly executed letter of transmittal (or a manually executed facsimile of that document), along with any required signature guarantees and any other required documents, and the certificates representing the shares of Viacom class A or class B common stock tendered;

 

  If you hold shares of Viacom class A or class B common stock through the Viacom Dividend Reinvestment Plan, you must deliver to the exchange agent at the address listed on the back cover of this Prospectus-Offer to Exchange a properly completed and duly executed letter of transmittal (or a manually executed facsimile of that document), along with any required signature guarantees and any other required documents. The Viacom Dividend Reinvestment Plan is referred to in this Prospectus-Offer to Exchange as the “Viacom DRP;”

 

  If you hold shares of Viacom class A or class B common stock though a broker, you should receive instructions from your broker on how to participate in this exchange offer. In this situation, do not complete the letter of transmittal. Please contact your broker directly if you have not yet received instructions. Some financial institutions may also effect tenders by book-entry transfer through The Depository Trust Company;

 

  If you hold shares of Viacom class A or class B common stock as a participant in a Viacom or Blockbuster employee benefit plan and your shares are eligible to be tendered in this exchange offer under the terms of the relevant plan, you will receive separate instructions on how to tender these shares and a form of election to tender your shares held under these plans from the trustees or administrators of these plans. In this situation, do not use the letter of transmittal to tender shares of Viacom class A or class B common stock held under these plans; or

 

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  If you wish to tender your shares of Viacom class A or class B common stock but the shares are not immediately available, or time will not permit the shares or other required documentation to reach the exchange agent prior to the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, you must follow the procedures for guaranteed delivery under the section entitled “The Exchange Offer—Procedures for Tendering—Guaranteed Delivery Procedures” beginning on page 60.

 

Delivery of Shares of Blockbuster Class A and Class B Common Stock (page 58)

 

Shares of Blockbuster class A and class B common stock will be delivered by book-entry transfer as soon as reasonably practicable after the acceptance of shares of Viacom class A or class B common stock for exchange and the determination of the final proration factor, if necessary.

 

Withdrawal Rights (page 62)

 

You may withdraw your tendered shares of Viacom class A or class B common stock at any time prior to the expiration of this exchange offer. If you change your mind again, you may re-tender your shares of Viacom class A or class B common stock by again following the exchange offer procedures prior to the expiration of this exchange offer.

 

No Appraisal Rights (page 54)

 

No appraisal rights are available to Viacom stockholders or Blockbuster stockholders in connection with this exchange offer.

 

Legal Limitations (page 67)

 

This document is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of Blockbuster class B common stock or Blockbuster class A common stock in any jurisdiction in which, except as provided below, the offer, sale or exchange is not permitted. Viacom is not aware of any jurisdiction in the United States where the making of this exchange offer or its acceptance would not be legal. If Viacom learns of any jurisdiction where making this exchange offer or its acceptance would not be permitted, Viacom currently intends to make a good faith effort to comply with the relevant law. If, after such good faith effort, Viacom cannot comply with such law, Viacom will determine whether this exchange offer will be made to and whether tenders will be accepted from or on behalf of persons who are holders of shares of Viacom class A or class B common stock residing in the jurisdiction.

 

SPIN-OFF AND DISPOSITIONS OF BLOCKBUSTER COMMON STOCK (page 68)

 

Blockbuster Class B Common Stock and Converted Class A Common Stock

 

Viacom will dispose of any shares of Blockbuster class B common stock and converted class A common stock it holds following this exchange offer and any subsequent spin-off. As soon as practicable following the completion of this exchange offer, Viacom will distribute in a spin-off to its stockholders its remaining shares of Blockbuster class B common stock and converted class A common stock (if any), except that once Viacom has so distributed more than 80% of the total voting power of Blockbuster in the aggregate in this exchange offer and any spin-off, Viacom may elect not to distribute its remaining shares in a spin-off so long as such election would not result in an increase in the number of votes per share of Blockbuster class B common stock as compared to the number of votes each share of Blockbuster class B common stock would have had if such shares had been included in any spin-off, in each case after giving effect to the adjustment described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between

 

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Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. The exchange agent, acting in its ongoing capacity as transfer agent for the Viacom stockholders otherwise entitled to receive fractional shares of Blockbuster class B common stock and converted class A common stock, will aggregate and cause to be sold all such fractional shares in the open market for the account of these stockholders.

 

Blockbuster Class A Common Stock

 

Viacom owns approximately 3.6 million shares of Blockbuster class A common stock, which Viacom previously purchased in the open market in order to maintain U.S. federal income tax consolidation with Blockbuster. Viacom intends to dispose of all of these shares prior to the completion of this exchange offer by contributing these shares of Blockbuster class A common stock to the Viacom Pension Plan and the CBS Combined Pension Plan.

 

RISK FACTORS (page 30)

 

In deciding whether to tender your shares of Viacom class A or class B common stock, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 30, as well as other information included in this document and the other documents to which you have been referred.

 

COMPARATIVE MARKET VALUE OF SECURITIES (page 71)

 

Viacom class A common stock and Viacom class B common stock is listed on the New York Stock Exchange under the symbols “VIA” and “VIAB,” respectively. Blockbuster class A common stock is listed on the New York Stock Exchange under the symbol “BBI.” Following the completion of this exchange offer, Blockbuster expects that the Blockbuster class B common stock will be listed on the New York Stock Exchange. Blockbuster intends to apply for listing of the shares of Blockbuster class B common stock on the New York Stock Exchange following the initial filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part.

 

On June 17, 2004, the last New York Stock Exchange trading day before the initial filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part, the closing sale prices of the Viacom class A common stock, the Viacom class B common stock and the Blockbuster class A common stock were $37.21, $36.66 and $15.39, respectively. On [            ], 2004, the last New York Stock Exchange trading day before the date of this Prospectus-Offer to Exchange, the closing sale prices of the Viacom class A common stock, the Viacom class B common stock and the Blockbuster class A common stock were $[            ], $[            ] and $[            ], respectively.

 

DESCRIPTION OF CAPITAL STOCK OF BLOCKBUSTER (page 120)

 

Following the effectiveness of the Blockbuster charter amendments, shares of Blockbuster class B common stock will not be convertible into shares of Blockbuster class A common stock. Holders of shares of Blockbuster class A common stock are entitled to one vote per share. Shares of Blockbuster class B common stock are currently entitled to five votes per share, and after completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share. Also see the section entitled “Description of Capital Stock of Blockbuster—Common Stock” beginning on page 120.

 

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REGULATORY APPROVAL (page 55)

 

Certain acquisitions of Blockbuster class A and class B common stock under this exchange offer may require a premerger notification filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. If you decide to participate in this exchange offer and, consequently, acquire enough shares of Blockbuster class A and class B common stock to exceed the $50 million threshold stated in the Hart-Scott-Rodino Act and associated regulations, and if an exemption under the Hart-Scott-Rodino Act or regulations does not apply, Viacom and you would be required to make filings under the Hart-Scott-Rodino Act and you would be required to pay the applicable filing fee. A filing requirement could delay the exchange of shares with you until the waiting periods in the Hart-Scott-Rodino Act have expired or been terminated. See the section entitled “The Transaction—Regulatory Approval” beginning of page 55.

 

U.S. FEDERAL INCOME TAX CONSEQUENCES (page 105)

 

Viacom will receive a tax opinion from Cravath, Swaine & Moore LLP to the effect that, for U.S. federal income tax purposes, this exchange offer and, if applicable, the spin-off will be tax-free to Viacom and its stockholders, except with respect to any cash received in lieu of fractional shares of Blockbuster class A and class B common stock. This tax opinion will not address any state, local or foreign tax consequences of this exchange offer which may be applicable to Viacom and its stockholders. You should consult your tax advisor as to the particular consequences to you of this exchange offer. See the sections entitled “Risk Factors—Risk Factors Relating to this Exchange Offer—If this Exchange Offer and Any Spin-Off Are Determined to be Taxable, Viacom and Tendering Stockholders Could Be Subject to a Material Amount of Taxes” and “U.S. Federal Income Tax Consequences” beginning on pages 47 and 105, respectively.

 

ACCOUNTING TREATMENT OF THIS EXCHANGE OFFER (page 55)

 

The shares of Viacom class A and class B common stock received by Viacom pursuant to this exchange offer will be recorded as an acquisition of treasury stock at a cost equal to the market value of the Viacom shares accepted in this exchange offer at the expiration of this exchange offer.

 

THE EXCHANGE AGENT

 

The exchange agent for this exchange offer is [            ].

 

THE INFORMATION AGENT

 

The information agent for this exchange offer is [            ].

 

THE CO-DEALER MANAGERS

 

The co-dealer managers for this exchange offer are Bear, Stearns & Co. Inc. and Goldman, Sachs & Co., and they are referred to in this Prospectus-Offer to Exchange as “Bear Stearns” and “Goldman Sachs” respectively.

 

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COMPARATIVE PER SHARE DATA

 

The following tables present certain historical and pro forma per share data for Viacom and Blockbuster. Holders of Viacom common stock who participate in this exchange offer will receive [            ] shares of Blockbuster class A common stock and [            ] shares of Blockbuster class B common stock for each share of Viacom class A or class B common stock tendered.

 

Viacom Per Share Data

 

    Year Ended or at December 31,

  Three Months
Ended or at
March 31,


    1999

  2000

  2001

  2002

  2003

  2003

  2004

Historical per share data

                                  (unaudited)

Net earnings (loss) before cumulative effect of change in accounting principle:

Basic

  $ 0.46   $ (0.30)   $ (0.13)   $ 1.26   $ 0.82   $ 0.26   $ 0.41

Diluted

  $ 0.45   $ (0.30)   $ (0.13)   $ 1.24   $ 0.82   $ 0.26   $ 0.41

Net earnings (loss):

Basic

  $ 0.46   $ (0.67)   $ (0.13)   $ 0.41   $ 0.81   $ 0.25   $ 0.41

Diluted

  $ 0.45   $ (0.67)   $ (0.13)   $ 0.41   $ 0.80   $ 0.25   $ 0.41

Book value per common share(1)

  $ 15.95   $ 32.07   $ 35.71   $ 35.78   $ 36.44   $ 36.04   $ 36.75

Cash dividends declared per common share(2)

    —       —       —       —     $ 0.12     —     $ 0.06

Unaudited pro forma per share data

                                         

Pro forma net earnings (loss) before cumulative effect of change in accounting principle:

Basic

              $ [      ]   $ [      ]   $ [      ]         $ [      ]

Diluted

              $ [      ]   $ [      ]   $ [      ]         $ [      ]

Pro forma book value per pro forma common share(3)

                                      $ [      ]

Pro forma cash dividends per common share(2)

                —       —     $ 0.12         $ 0.06

Blockbuster Per Share Data

                                         
    Year Ended or at December 31,

 

Three Months
Ended or at

March 31,


    1999

  2000

  2001

  2002

  2003

  2003

  2004

Historical per share data

                                  (unaudited)

Income (loss) before cumulative effect of change in accounting principle:

Basic

  $ (0.44)   $ (0.43)   $ (1.37)   $ 1.06   $ (5.44)   $ 0.47   $ 0.62

Diluted

  $ (0.44)   $ (0.43)   $ (1.37)   $ 1.04   $ (5.44)   $ 0.47   $ 0.62

Net income (loss):

Basic

  $ (0.44)   $ (0.43)   $ (1.37)   $ (9.11)   $ (5.46)   $ 0.45   $ 0.62

Diluted

  $ (0.44)   $ (0.43)   $ (1.37)   $ (8.96)   $ (5.46)   $ 0.45   $ 0.62

Book value per common share(1)

  $ 35.00   $ 34.33   $ 32.52   $ 23.20   $ 17.96   $ 23.63   $ 18.57

Cash dividends declared per common share(4)

  $ 0.02   $ 0.08   $ 0.08   $ 0.08   $ 0.08   $ 0.02   $ 0.02

 

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     Year Ended or at December 31,

   

Three Months
Ended or at

March 31,


     1999

   2000

   2001

   2002

   2003

    2003

  2004

Unaudited pro forma per share data                              (unaudited)

Pro forma income (loss) before cumulative effect of change in accounting principle:

Basic

                       $ (5.67 )       $ 0.57

Diluted

                       $ (5.67 )       $ [       ]

Pro forma book value per pro forma common share(5)

                                   $ 13.60

Pro forma cash dividends per common share(6)

                       $ 5.08         $ 0.02

(1) Book value per common share is defined as total stockholders’ equity divided by the sum of the outstanding class A and class B common stock.
(2) Viacom’s board of directors has declared a quarterly cash dividend of $0.06 per share on its common stock beginning in the third quarter of 2003.
(3) The pro forma outstanding shares used in calculating Viacom’s pro forma book value per share reflect the reduction of [            ] million shares as a result of the consummation of this exchange offer (see the section entitled “Viacom Unaudited Pro Forma Consolidated Condensed Financial Information” beginning on page 76).
(4) Blockbuster’s board of directors has declared a cash dividend of $0.02 per share each quarter beginning in October 1999, after Blockbuster’s initial public offering.
(5) The pro forma stockholders’ equity used in calculating Blockbuster’s unaudited pro forma book value per pro forma common share reflects the payment of the special distribution and other pro forma adjustments.
(6) Unaudited pro forma cash dividends per common share include Blockbuster’s payment of a special distribution of $5.00 per share to all Blockbuster stockholders as of January 1, 2003.

 

See the footnotes to “Summary—Selected Historical Financial Data For Viacom and Blockbuster” beginning on page 23 for items affecting comparability between periods.

 

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SELECTED HISTORICAL FINANCIAL DATA FOR VIACOM AND BLOCKBUSTER

 

Viacom Selected Historical Financial Data

 

The selected consolidated financial data presented below has been derived from, and should be read together with, Viacom’s consolidated financial statements and the accompanying notes and the related “Management’s Discussion and Analysis of Results of Operations and Financial Condition” sections included in Viacom’s Annual Report on Form 10-K for the year ended December 31, 2003 and Viacom’s Quarterly Report on Form 10-Q for the period ended March 31, 2004, which are incorporated by reference into this document. To find out where you can obtain copies of Viacom’s documents that have been incorporated by reference, see the section entitled “Where You Can Find More Information About Viacom and Blockbuster” beginning on page 139.

 

Viacom Inc.

Statement of Operations Data

(in millions, except per share amounts)

 

     Year Ended December 31,

  

Three Months Ended

March 31,


     1999

   2000(a)(b)

    2001(c)

    2002(d)

   2003(e)(f)

   2003

   2004(f)

                                (unaudited)

Revenues

   $ 12,858.8    $ 20,043.7     $ 23,222.8     $ 24,605.7    $ 26,585.3    $ 6,050.8    $ 6,772.4

Depreciation and amortization

   $ 844.7    $ 2,223.5     $ 3,087.0     $ 945.6    $ 999.8    $ 241.2    $ 251.5

Operating income

   $ 1,247.3    $ 1,320.9     $ 1,460.2     $ 4,596.7    $ 3,625.8    $ 986.8    $ 1,179.5

Net earnings (loss) before cumulative effect of change in accounting principle

   $ 334.0    $ (363.8 )   $ (223.5 )   $ 2,206.6    $ 1,435.4    $ 461.6    $ 710.5

Net earnings (loss)

   $ 334.0    $ (816.1 )   $ (223.5 )   $ 725.7    $ 1,416.9    $ 443.1    $ 710.5

Net earnings (loss) attributable to common stock

   $ 321.6    $ (816.1 )   $ (223.5 )   $ 725.7    $ 1,416.9    $ 443.1    $ 710.5

Basic earnings (loss) per common share:

                                                  

Net earnings (loss) before cumulative effect of change in accounting principle

   $ 0.46    $ (0.30 )   $ (0.13 )   $ 1.26    $ 0.82    $ 0.26    $ 0.41

Net earnings (loss)

   $ 0.46    $ (0.67 )   $ (0.13 )   $ 0.41    $ 0.81    $ 0.25    $ 0.41

Diluted earnings (loss) per common share:

                                                  

Net earnings (loss) before cumulative effect of change in accounting principle

   $ 0.45    $ (0.30 )   $ (0.13 )   $ 1.24    $ 0.82    $ 0.26    $ 0.41

Net earnings (loss)

   $ 0.45    $ (0.67 )   $ (0.13 )   $ 0.41    $ 0.80    $ 0.25    $ 0.41

Weighted average shares outstanding:

                                                  

Basic

     695.2      1,225.3       1,731.6       1,752.8      1,744.0      1,745.9      1,731.0

Diluted

     709.5      1,225.3       1,731.6       1,774.8      1,760.7      1,761.1      1,744.5

Cash dividends declared per common share

   $ —      $ —       $ —       $ —      $ 0.12      —      $ 0.06

 

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Viacom Inc.

Balance Sheet Data

(in millions)

 

     At December 31,

   At March 31,

     1999

   2000

   2001

   2002

   2003

   2003

   2004

                              (unaudited)

Total assets

   $ 24,486.4    $ 82,809.3    $ 90,809.9    $ 90,043.2    $ 89,848.5    $ 89,165.4    $ 89,731.5

Long-term debt, including capital leases(g)

   $ 5,992.0    $ 12,697.7    $ 11,122.7    $ 10,404.2    $ 9,879.5    $ 10,075.5    $ 9,820.7

Total stockholders’ equity

   $ 11,132.0    $ 47,966.9    $ 62,716.8    $ 62,487.8    $ 63,205.0    $ 62,891.6    $ 63,493.0

(a) As a result of the adoption of Statement of Position 00-2, “Accounting by Producers or Distributors of Films,” Viacom recorded a non-cash after-tax charge of $452.3 million as a cumulative effect of a change in accounting principle.
(b) On May 4, 2000, CBS Corporation merged with and into Viacom, and, effective from such date, its results of operations are included in Viacom’s consolidated financial results.
(c) Results include a primarily non-cash Blockbuster charge of $396.6 million ($198.3 million, net of minority interest and tax) for the elimination of less-productive VHS tapes, a charge of approximately $75.4 million at MTV Networks related to a restructuring plan to reduce headcount and close certain international offices and a charge of $53.4 million in connection with the integration of UPN and CBS Network operations.
(d) As a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), Viacom recorded an after-tax non-cash charge of $1.5 billion, net of $336.1 million of minority interest, as a cumulative effect of a change in accounting principle.
(e) Results include a non-cash charge of $1.3 billion ($1.0 billion, net of minority interest and tax) related to a reduction in Blockbuster’s goodwill and other long-lived assets resulting from the application of SFAS 142 and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).
(f) Viacom’s board of directors declared a quarterly cash dividend of $0.06 per share on its common stock during the third and fourth quarters of 2003 and the first quarter of 2004.
(g) Long-term debt, including capital leases, includes both the current and long-term portions of long-term debt and capital leases.

 

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Blockbuster Selected Historical Financial Data

 

The selected consolidated financial data presented below has been derived from, and should be read together with, Blockbuster’s consolidated financial statements and the accompanying notes and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections included in Blockbuster’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Blockbuster’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which reports are included in this Prospectus-Offer to Exchange as Annex A and Annex B, respectively.

 

Blockbuster Inc.

Statement of Operations Data

(in millions, except per share amounts and worldwide store data)

 

     Year Ended or at December 31,

    Three Months Ended
or at March 31,


     1999

    2000(a)

    2001(b)

    2002

    2003(c)

    2003

    2004

                                   (unaudited)

Revenues

   $ 4,463.5     $ 4,960.1     $ 5,156.7     $ 5,565.9     $ 5,911.7     $ 1,517.8     $ 1,503.1

Gross profit

   $ 2,701.0     $ 2,924.1     $ 2,736.0     $ 3,207.2     $ 3,521.9     $ 886.1     $ 923.6

Amortization of intangibles

   $ 171.8     $ 180.1     $ 177.1     $ 1.7     $ 2.4     $ 0.3     $ 0.5

Impairment of goodwill and other long-lived assets

   $ —       $ —       $ —       $ —       $ 1,304.9     $ —       $ —  

Operating income (loss)

   $ 121.7     $ 75.7     $ (219.6 )   $ 337.1     $ (845.2 )   $ 148.7     $ 124.9

Income (loss) before cumulative effect of change in accounting principle

   $ (69.2 )   $ (75.9 )   $ (240.3 )   $ 189.4     $ (979.5 )   $ 84.9     $ 112.6

Cumulative effect of change in accounting principle, net of tax(d)

   $ —       $ —       $ —       $ (1,817.0 )   $ (4.4 )   $ (4.4 )   $ —  

Net income (loss)

   $ (69.2 )   $ (75.9 )   $ (240.3 )   $ (1,627.6 )   $ (983.9 )   $ 80.5     $ 112.6

Basic earnings (loss) per common share:

                                                      

Income (loss) before cumulative effect of change in accounting principle

   $ (0.44 )   $ (0.43 )   $ (1.37 )   $ 1.06     $ (5.44 )   $ 0.47     $ 0.62

Net income (loss)(d)

   $ (0.44 )   $ (0.43 )   $ (1.37 )   $ (9.11 )   $ (5.46 )   $ 0.45     $ 0.62

Diluted earnings (loss) per common share:

                                                      

Income (loss) before cumulative effect of change in accounting principle

   $ (0.44 )   $ (0.43 )   $ (1.37 )   $ 1.04     $ (5.44 )   $ 0.47     $ 0.62

Net income (loss)(d)

   $ (0.44 )   $ (0.43 )   $ (1.37 )   $ (8.96 )   $ (5.46 )   $ 0.45     $ 0.62

Dividends per share

   $ 0.02     $ 0.08     $ 0.08     $ 0.08     $ 0.08     $ 0.02     $ 0.02

Weighted average shares outstanding:

                                                      

Basic

     156.1       175.0       175.6       178.6       180.1       179.6       181.0

Diluted

     156.1       175.0       175.6       181.6       180.1       180.1       182.0

Balance Sheet Data

 

Total assets

   $ 8,540.8     $ 8,548.9     $ 7,752.4     $ 6,243.8     $ 4,854.9     $ 5,981.0     $ 4,747.7

Long-term debt, including capital leases(i)

   $ 1,325.2     $ 1,169.3     $ 727.8     $ 541.5     $ 219.9     $ 562.5     $ 158.8

Total stockholders’ equity

   $ 6,125.0     $ 6,008.4     $ 5,748.7     $ 4,167.0     $ 3,249.3     $ 4,246.8     $ 3,362.4

 

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     Year Ended or at December 31,

    Three Months Ended
or at March 31,


 
     1999

    2000(a)

    2001(b)

    2002

    2003(c)

    2003

    2004

 
                                   (unaudited)  
Cash Flow Data  

Cash flows provided by operating activities

   $ 1,142.8     $ 1,320.8     $ 1,395.1     $ 1,451.2     $ 1,416.1     $ 185.3     $ 190.4  

Cash flows used for investing activities

   $ (1,258.1 )   $ (1,056.8 )   $ (945.2 )   $ (1,303.5 )   $ (1,010.4 )   $ (221.4 )   $ (223.3 )

Cash flows provided by/(used for) financing activities

   $ 137.2     $ (187.2 )   $ (441.2 )   $ (199.2 )   $ (335.5 )   $ 16.4     $ (66.2 )
Margins  

Rental margin(e)

     66.0 %     64.4 %     57.7 %     66.1 %     70.0 %     67.9 %     71.8 %

Merchandise margin(f)

     21.0 %     21.4 %     18.9 %     17.1 %     19.8 %     17.1 %     23.0 %

Gross margin(g)

     60.5 %     59.0 %     53.1 %     57.6 %     59.6 %     58.4 %     61.4 %
Worldwide Store Data  

Same store revenues increase (decrease)(h)

     8.3 %     5.6 %     2.5 %     5.1 %     (2.2 )%     5.3 %     (7.0 )%

Company-operated stores at end of period

     5,879       6,254       6,412       6,907       7,105       6,970       7,112  

Franchised and joint venture stores at end of period

     1,274       1,423       1,569       1,638       1,762       1,647       1,779  

Total stores at end of period

     7,153       7,677       7,981       8,545       8,867       8,617       8,891  

(a) During the fourth quarter of 2000, Blockbuster recognized a non-cash charge of $31.6 million, related to the impairment of certain hardware and capitalized software costs in its new media segment.
(b) In 2001, Blockbuster recognized charges of $396.6 million related to the execution of a strategic re-merchandising plan to allow for an expansion of store space for DVD and other strategic product offerings and a change in accounting estimates related to its rental library. The charges decreased gross profit by $337.6 million and operating income by $394.7 million.
(c) During the fourth quarter of 2003, Blockbuster recognized a non-cash charge of $1.3 billion to record an impairment of goodwill and other long-lived assets, in accordance with SFAS 142 and SFAS 144.
(d) During the first quarter of 2002, Blockbuster adopted SFAS 142 which eliminates the amortization of goodwill and intangible assets with indefinite lives and requires instead that those assets be tested for impairment annually. The application of the transition provisions of this new accounting standard required Blockbuster to reduce its goodwill by $1.82 billion. During the first quarter of 2003, Blockbuster adopted SFAS 143, “Accounting for Asset Retirement Obligations, which requires the capitalization of any retirement costs as part of the total cost of the related long-lived asset and the subsequent allocation of the total expense to future periods. The application of this new accounting standard required Blockbuster to record a $4.4 million cumulative effect of a change in accounting principle.
(e) Rental gross profit as a percentage of rental revenues.
(f) Merchandise gross profit as a percentage of merchandise sales.
(g) Gross profit as a percentage of total revenues.
(h) A store is included in the same store revenues calculation after it has been opened and operated by Blockbuster for more than 52 weeks. An acquired store becomes part of the same store base in the 53rd week after its acquisition and conversion. The percentage change is computed by comparing total net revenues for stores at the end of the applicable reporting period with total net revenues from these same stores for the comparable period in the prior year.
(i) Long-term debt, including capital leases, includes both the current and long-term portions of long-term debt and capital leases.

 

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SUMMARY UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION FOR VIACOM AND BLOCKBUSTER

 

Viacom Summary Unaudited Pro Forma Consolidated Condensed Financial Information

 

The following summary unaudited pro forma financial information is derived from and should be read together with the information provided in the section entitled “Viacom Unaudited Pro Forma Consolidated Condensed Financial Information” and the accompanying notes beginning on page 76. The summary unaudited pro forma financial information has been prepared based upon the historical consolidated financial statements and accompanying notes of Viacom and Blockbuster incorporated by reference or included herein as the case may be. The unaudited pro forma consolidated statement of operations data is presented as if the split-off occurred as of the beginning of the earliest period presented. The unaudited pro forma consolidated balance sheet data is presented as if the split-off occurred on March 31, 2004. For a more complete description of the split-off, see the section entitled “Viacom Unaudited Pro Forma Consolidated Condensed Financial Information” and the accompanying notes beginning on page 76.

 

Viacom’s summary unaudited pro forma consolidated condensed financial information is presented for illustrative purposes only and does not necessarily indicate the operating results or the financial position that would have been achieved had the split-off been completed as of the dates indicated or the results that may be obtained in the future. This information should be read together with the consolidated financial statements and accompanying notes and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections included in Viacom’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Viacom’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, which reports are incorporated by reference into this document.

 

Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Statement of Operations Data

(in millions, except per share amounts)

 

     Year Ended December 31,

   Three Months
Ended
March 31,
2004


     2001

    2002

   2003

  

Revenues

   $ 18,240.4     $ 19,186.8    $ 20,827.6    $ 5,298.3

Operating income

   $ 1,677.9     $ 4,223.0    $ 4,473.8    $ 1,056.5

Net earnings (loss) before cumulative effect of change in accounting principle

   $ (29.2 )   $ 2,030.0    $ 2,236.8    $ 618.8

Net earnings (loss) per common share before cumulative effect of change in accounting principle:

                            

Basic

     [            ]       [            ]      [            ]      [            ]

Diluted

     [            ]       [            ]      [            ]      [            ]

Weighted average number of common shares outstanding:

                            

Basic

     [            ]       [            ]      [            ]      [            ]

Diluted

     [            ]       [            ]      [            ]      [            ]

 

Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Balance Sheet Data

(in millions)

 

     At
March 31,
2004


Total assets

   $ [            ]

Long-term debt, including capital leases

     9,661.9

Total stockholders’ equity

     [            ]

 

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Blockbuster Summary Unaudited Pro Forma Consolidated Condensed Financial Information

 

The following summary unaudited pro forma financial information is derived from and should be read together with the information provided in the section entitled “Blockbuster Unaudited Pro Forma Consolidated Condensed Financial Information” and the accompanying notes beginning on page 84. The summary unaudited pro forma financial information has been prepared based on Blockbuster’s historical consolidated financial statements and accompanying notes included in Blockbuster’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Blockbuster’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which are included in this Prospectus-Offer to Exchange as Annex A and Annex B, respectively. The unaudited pro forma consolidated condensed statement of operations data assumes that the split-off and related transactions occurred as of January 1, 2003. The unaudited pro forma consolidated balance sheet data assumes that these transactions occurred as of March 31, 2004. For a more complete description of the Blockbuster pro forma adjustments, see the section entitled “Blockbuster Unaudited Pro Forma Consolidated Condensed Financial Information” and the accompanying notes thereto beginning on page 84.

 

Blockbuster’s summary unaudited pro forma consolidated condensed financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have been achieved had the split-off and related transactions been completed as of the dates indicated or of the operating results or financial position that may be obtained in the future. Blockbuster believes the estimates and assumptions used to prepare its unaudited pro forma consolidated condensed financial information provide a reasonable basis for presenting the significant effects of the split-off and related transactions and that the pro forma adjustments give an appropriate effect to the estimates and assumptions and are properly applied in Blockbuster’s unaudited pro forma consolidated condensed financial information.

 

This information should be read together with the consolidated financial statements and accompanying notes and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections included in Blockbuster’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Blockbuster’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which reports are included in this Prospectus–Offer to Exchange as Annex A and Annex B, respectively.

 

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Blockbuster Inc.

Unaudited Pro Forma Consolidated Condensed Statement of Operations Data

(in millions, except per share amounts)

 

    

Year Ended

December 31, 2003


    

Three Months
Ended

March 31, 2004


 

Revenues

   $ 5,911.7      $ 1,503.1  

Gross profit

   $ 3,521.9      $ 923.6  

Operating income (loss)

   $ (861.8 )    $ 120.7  

Income (loss) before cumulative effect of change in accounting principle

   $ (1,020.4 )    $ 102.3  

Income (loss) per share before cumulative effect of change in accounting principle:

                 

Basic

   $ (5.67 )    $ 0.57  

Diluted

   $ (5.67 )    $ [        ]

Weighted average number of common shares outstanding:

                 

Basic

     180.1        181.0  

Diluted

     180.1        [          ]

 

Blockbuster Inc.

Unaudited Pro Forma Consolidated Condensed Balance Sheet Data

(in millions)

 

    

At

March 31, 2004


Total assets

   $ 4,799.3

Long-term debt, including capital lease obligations

   $ 1,108.8

Total stockholders’ equity

   $ 2,462.9

 

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RISK FACTORS

 

You should consider carefully all of the information set forth or incorporated by reference in this document and, in particular, the following risk factors in considering whether or not to tender your shares of Viacom class A or class B common stock pursuant to this exchange offer.

 

The risk factors have been separated into three groups:

 

  risks that relate to Viacom’s business;

 

  risks that relate to Blockbuster’s business; and

 

  risks that relate to this exchange offer.

 

Prior to the split-off, the risks described below that relate to Blockbuster’s business apply to Viacom. Viacom will also have certain liabilities with respect to Blockbuster which are described below in the section entitled “—Risk Factors Relating to Viacom’s Business—Viacom Has Contingent Liabilities Related to Discontinued Businesses.” In addition, the risks described below and elsewhere in this Prospectus-Offer to Exchange are not the only ones Viacom and Blockbuster are facing or that relate to this exchange offer. The risks described below are considered to be the most material. However, there may be other unknown or unpredictable economic, business, competitive, regulatory, geopolitical or other factors that also could have material adverse effects on Viacom’s or Blockbuster’s future results or on this exchange offer. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

 

If any of the events described below under the sections entitled “—Risk Factors Relating to Viacom’s Business” and “—Risk Factors Relating to Blockbuster’s Business” were to occur, Viacom’s and Blockbuster’s business, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected. In any such case, the price of shares of Viacom class A and/or class B common stock and/or shares of Blockbuster class A and/or class B common stock could decline, and you could lose all or part of your investment in Viacom or Blockbuster. In addition, the risks described below and elsewhere in this document associated with Blockbuster are, until the completion of this exchange offer and any spin-off, also associated with Viacom due to Viacom’s ownership interest in Blockbuster.

 

In addition, for a discussion of additional uncertainties associated with (1) Viacom’s and Blockbuster’s businesses and (2) forward-looking statements in this document, see the section entitled “Cautionary Statement Concerning Forward-Looking Statements” on page 48.

 

For the purposes of these risk factors, unless the context otherwise indicates, Viacom has assumed that this exchange offer is fully subscribed and that all shares of Blockbuster class B common stock and converted class A common stock held by Viacom are distributed through this exchange offer and that all of the shares of Blockbuster class A common stock Viacom previously purchased in the open market in order to maintain U.S. federal income tax consolidation with Blockbuster are contributed to the Viacom Pension Plan and the CBS Combined Pension Plan.

 

Risk Factors Relating to Viacom’s Business

 

Adverse Changes to Factors Affecting Advertising Sales Could Have a Negative Effect on Viacom’s Revenues

 

Viacom derives substantial revenues from the sale of advertising on its over-the-air networks, basic cable networks, television stations, radio stations and outdoor businesses (and, if Viacom completes this exchange offer, advertising revenues will constitute an even higher percentage of Viacom’s total revenues than they

 

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currently do). The sale of advertising is affected by viewer demographics, viewer ratings and market conditions for advertising. Adverse changes to any of these factors, including as a result of acts of terrorism or war, could have a negative effect on revenues.

 

Viacom’s Basic Cable and Premium Subscription Television Networks Are Dependent Upon Affiliation Agreements with Cable and Direct-to-Home Distributors. Adverse Changes to the Terms of These Agreements and Consolidation Among Distributors Could Have a Negative Effect on Viacom’s Revenues

 

Viacom’s basic cable networks and premium subscription television networks are dependent upon affiliation agreements with cable and direct-to-home satellite services, which are referred to in this Prospectus-Offer to Exchange as “DTH,” distributors on acceptable terms. The loss of carriage on such distributors, or continued carriage on less favorable terms, could adversely affect, with respect to basic cable networks, revenues from subscriber fees and the ability to sell advertising and, with respect to premium subscription television networks, subscriber fee revenues. In addition, continued consolidation among cable and/or DTH distributors and vertical integration of such distributors into the cable or broadcast network business, could have an adverse effect on subscriber fees and advertising revenues, as Viacom’s ability to launch new networks or maintain or obtain additional distribution for existing networks may be impacted by these factors.

 

Operating Results from Viacom’s Motion Picture and Television Production Businesses Fluctuate Depending on the Costs of Production and Public Acceptance, Which Are Unpredictable

 

Operating results derived from Viacom’s motion picture and television production businesses fluctuate depending primarily upon the cost of such productions and acceptance of such productions by the public, which are difficult to predict. Motion picture and television production has experienced cycles in which increased costs of talent, reduced availability of co-financing opportunities, and other factors have resulted in higher production costs. In addition, the commercial success of Viacom’s motion picture and television productions depends upon the quality and acceptance of other competing productions, and the availability of alternative forms of entertainment and leisure time activities.

 

Any Impairment of Goodwill or Other Intangible Assets Required by SFAS 142 Could Have a Significant Effect on Viacom’s Reported Net Earnings

 

In accordance with SFAS 142, Viacom tests goodwill and other intangible assets for impairment during the fourth quarter of each year, and on an interim date should factors or indicators become apparent that would require an interim test. A downward revision in the fair value of a reporting unit could result in an impairment of goodwill under SFAS 142 and a non-cash charge would be required. Such a charge could have a significant effect on Viacom’s reported net earnings.

 

Viacom Is Subject to Laws and Regulations That Are Subject to Interpretation or Change Which Could Adversely Impact Viacom

 

While Viacom seeks to ensure compliance with FCC indecency laws and regulations, the definition of “indecency” is subject to interpretation and there can be no assurance that employees of Viacom will not make decisions resulting in the broadcast of programming that is viewed by regulators or the public as not meeting such standards. Such programming could subject Viacom to regulatory review or investigation, fines, adverse publicity or other sanctions including the loss of station licenses. In addition, changes in laws and regulations, including in particular FCC ownership rules, could, directly or indirectly, adversely affect the operations and ownership of Viacom’s properties.

 

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Piracy or Unauthorized Distribution of Viacom’s Copyrighted Materials Could Negatively Affect Viacom’s Operations

 

Technology developments, including digital copying and file compression, and the growing penetration of high-bandwidth Internet connections, increase the threat of content piracy by making it easier to duplicate and widely distribute pirated material. Viacom takes actions to vigorously enforce its rights and protect its copyrighted materials and products; however, there can be no assurance that it will be successful in preventing the distribution of pirated content. Increased piracy of Viacom’s copyrighted materials could negatively affect its operations and financial results.

 

Certain Technological Advances and Changing Consumer Preferences Could Adversely Affect Viacom’s Businesses

 

Recently introduced technologies, such as personal video recorders, video-on-demand, DVD recorders, and the availability of television and motion picture programming over the Internet, are becoming more widely available at reduced cost to consumers. While these technologies create opportunities for Viacom, changing consumer preferences for entertainment products, and the ability to skip commercial advertising or to watch shows at times chosen by the consumer, could make television less attractive to advertisers, reduce the amounts distributors are prepared to pay for programming or otherwise have an adverse effect on Viacom’s businesses.

 

Viacom Has Contingent Liabilities Related to Discontinued Businesses

 

Viacom has contingent liabilities related to discontinued businesses, including environmental liabilities, liabilities related to illnesses of former employees, asbestos liabilities and other pending and threatened litigation. While the pending or threatened litigations and environmental and other liabilities should not have a material adverse effect on Viacom, there can be no assurance in this regard. Viacom will also have certain liabilities in connection with the divestiture of Blockbuster, including under the IPO agreement, the amended and restated release and indemnification agreement and the amended and restated tax matters agreement, each of which is further described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster” beginning on page 91.

 

Viacom’s Operating Results Fluctuate Due to Timing and Availability of Theatrical and Home Video Releases and the Recording of License and Syndication Fees for Television Programming

 

Viacom’s operating results fluctuate due to the timing and availability of theatrical and home video releases, as well as the recording of license fees for television exhibition of motion pictures and for syndication and basic cable exhibition of television programming in the period that the products are available for such exhibition.

 

National Amusements Has Voting Control of Viacom and Is in a Position to Control the Outcome of Corporate Actions that Require Stockholder Approval

 

National Amusements, through its beneficial ownership of Viacom’s class A common stock, has voting control of Viacom. Mr. Sumner M. Redstone, the controlling stockholder of National Amusements, is the chairman of the board of directors and chief executive officer of Viacom. National Amusements is in a position to control the outcome of corporate actions that require stockholder approval, including the election of directors, issuance of securities and transactions involving a change of control.

 

Viacom is Functioning Under New Operating Management and With a Management Structure that is Unproven

 

On June 1, 2004, Viacom announced the appointment of Tom Freston and Leslie Moonves as co-presidents and co-chief operating officers, replacing the then-current president and chief operating officer, Mel Karmazin.

 

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Until that time, Mr. Freston was the chairman and chief executive officer of Viacom’s MTV Networks unit and Mr. Moonves was the chairman and chief executive officer of CBS. Until this recent management change, Viacom had a sole president and chief operating officer. Viacom does not have experience with a co-president and co-chief operating officer management structure, and there can be no assurance that the transition to this new management structure, or the new structure itself, will be successful.

 

Labor Difficulties Could Adversely Impact Viacom’s Operations

 

In the operation of its businesses, Viacom engages the services of writers, directors, actors and others, which are subject to collective bargaining agreements. Work stoppages and/or higher costs in connection with these agreements could adversely impact Viacom’s operations.

 

Viacom’s Revenues May Fluctuate Based on the Seasonality of Certain of Its Businesses

 

Some of Viacom’s businesses are seasonal. The home video retail business and the consumer publishing business are subject to increased periods of demand coinciding with summer and winter holidays, while a substantial majority of the theme parks’ operating income is generated from May through September. In addition, the home video and theme parks businesses’ revenues are influenced by weather. Viacom’s advertiser-supported businesses experience fluctuations based on the timing of advertising expenditures by retailers.

 

Risk Factors Relating to Blockbuster’s Business

 

Current Studio Pricing Policies Have Resulted in Increased Competition from Mass Merchant Retailers, Which Has Affected, and Will Continue to Affect, Consumer Rental and Purchasing Behavior. Blockbuster Cannot Control or Predict with Certainty Future Studio Decisions. Future Changes in Studio Pricing or Other Practices Could Negatively Impact Blockbuster’s Profitability

 

Studio pricing for movies released to home video retailers historically was based on whether or not a studio desired to promote a movie for both rental and sale to the consumer, or primarily for rental, from the beginning of the home video retailer distribution window. In order to promote a movie title for rental, the title would be released to home video retailers at a price that was too high to allow for an affordable sales price by the retailer to the consumer at the beginning of the home video retailer distribution window. As rental demand subsided, the studio would reduce pricing in order to then allow for reasonably priced sales to consumers. Currently, substantially all DVD titles are released at a price to the home video retailer that is low enough to allow for an affordable sales price by the retailer to the consumer from the beginning of the home video retailer distribution window. This sell-through pricing policy has led to increasing competition from other retailers, including mass merchants such as Wal-Mart, Best Buy, Circuit City and online retailers, who are able, due to the lower sell-through prices, to purchase DVDs for sale to consumers at the same time as traditional home video retailers, like Blockbuster, purchase both DVDs and VHS products for rental. In addition, some retailers sell movies at lower prices in order to increase overall traffic to their stores or businesses, and mass merchants may be more willing to sell at lower, or even below wholesale, prices because of their opportunity to move customers to higher dollar margin items, such as televisions. These factors have increased consumer interest in purchasing DVDs, which has reduced the significance of the VHS rental window.

 

Blockbuster believes that the increased consumer purchases are due in part to consumer interest in building DVD libraries of classic movies and personal favorites and that the studios will remain dependent on the traditional home video retailer to generate revenues for the studios from titles that are not classics or current box office hits. Blockbuster therefore believes the importance of the video rental industry to the studios will continue to be a factor in studio pricing decisions. However, Blockbuster cannot control or predict studio pricing policies with certainty, and Blockbuster cannot assure you that consumers will not, as a result of further decreases in studio sell-through pricing and/or sustained or further depressed pricing by competitors, increasingly desire to purchase rather than rent movies. Personal DVD libraries could also cause consumers to rent or purchase fewer

 

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movies in the future. Blockbuster’s profitability could, therefore, be negatively affected if, in light of any such consumer behavior, Blockbuster was unable to (i) grow its rental business, (ii) replace gross profits from generally higher-margin rentals with gross profits from increased sales of generally lower-margin sell-through product, or (iii) otherwise positively affect gross profits, such as through price increases or cost reductions. Blockbuster’s ability to achieve one or more of these objectives is subject to risks, including the risk that Blockbuster may not be able to compete effectively with other DVD retailers, some of whom may have competitive advantages such as the pricing flexibility described above or favorable consumer perceptions regarding value.

 

In any wholesale pricing environment, the extent of Blockbuster’s profitability is dependent on its ability to enter into arrangements with the studios that effectively balance cost considerations and the number of copies of a title stocked by Blockbuster. Each type of arrangement provides different advantages and challenges for Blockbuster. For example, Blockbuster has benefited from sell-through pricing of DVDs because the lower cost associated with DVD product has resulted in higher rental margins than product purchased under Blockbuster’s historical VHS revenue-sharing arrangements.

 

Blockbuster’s profitability could be negatively affected if studios were to make other changes in their wholesale pricing policies, which could include pricing rental windows for DVDs or expanded exploitation by studios of the international two-tiered pricing laws. In addition, Blockbuster cannot predict what use the studios might make of current or future alternative supply methods, such as downloading to stores or consumers, or what impact the use of such supply chain changes by Blockbuster or its competitors might have on Blockbuster’s profitability.

 

Blockbuster’s Video Business Could Lose a Competitive Advantage if the Movie Studios Were to Shorten or Eliminate the Home Video Retailer “Distribution Window” or Otherwise Adversely Change Their Current Practices With Respect to the Timing of the Release of Movies to the Various Distribution Channels

 

A competitive advantage that home video retailers currently enjoy over most other movie distribution channels, except theatrical release, is the early timing of the home video retailer “distribution window.” After the initial theatrical release of a movie, studios generally make their movies available to home video retailers (for rental and retail, including by mass merchant retailers) for specified periods of time. This distribution window is typically exclusive against most other forms of non-theatrical movie distribution, such as pay-per-view, video-on-demand, premium television, basic cable and network and syndicated television. The length of this exclusive distribution window for home video retailers varies, but has traditionally ranged from 45 to 60 days for domestic video retailers. Thereafter, movies are made sequentially available to television distribution channels.

 

Blockbuster’s business could be negatively affected if:

 

  the home video retailer distribution windows were no longer the first following the theatrical release;

 

  the length of the home video retailer distribution windows were shortened; or

 

  the home video retailer distribution windows were no longer as exclusive as they are now;

 

because newly released movies would be made available earlier on these other forms of non-theatrical movie distribution. As a result, consumers would no longer need to wait until after the home video retailer distribution window to view a newly released movie on these other distribution channels. According to industry statistics, more movies are now being released to pay-per-view at the shorter end of the distribution window range than at the longer end. In addition, many of the major movie studios have entered into various ventures to provide video-on-demand or similar services of their own. Increased studio participation in or support of these types of services could impact their decisions with respect to the timing and exclusivity of the home video retailer distribution window.

 

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Blockbuster believes that the studios have a significant interest in maintaining a viable home video retail industry. However, because the order, length and exclusivity of each window for each distribution channel is determined solely by the studio releasing the movie, Blockbuster cannot predict the impact, if any, of any future decisions by the studios. In addition, any consolidation or vertical integration of media companies to include both content providers and digital distributors could pose a risk to the continuation of the distribution window.

 

If the Average Sales Price for Blockbuster’s Previously Rented Product Is Not at or Above an Expected Price, Blockbuster’s Expected Gross Margins May Be Adversely Affected

 

To achieve Blockbuster’s expected revenues and gross margins, Blockbuster needs to sell its previously rented product at or above an expected price. If the average sales price of Blockbuster’s previously rented product is not at or above this expected price, Blockbuster’s revenues and gross margins may be adversely affected. At the same time, it is important that Blockbuster maximize its overall rental stream through its allocation of store space. Blockbuster may need to turn its inventory of previously rented product more quickly in the future in order to make room in its stores for additional DVDs or new initiatives. Therefore, Blockbuster cannot assure you that in the future it will be able to sell, on average, its previously rented product at or above the expected price.

 

Other factors that could affect Blockbuster’s ability to sell its previously rented product at expected prices include:

 

  consumer desire to own the particular movie or game;

 

  the amount of previously rented product or traded product available for sale by others to the public; and

 

  changes in the price of retail product by the studios or changes by other retailers, particularly the mass merchants mentioned above.

 

In addition, Blockbuster’s sales of previously rented product, especially DVDs, compete with sales of newly released product that is priced for sell-through.

 

Blockbuster’s Financial Results Could Be Adversely Affected if Blockbuster Is Unable to Manage Its Retail Inventory Effectively or if Blockbuster Is Unable to Obtain or Maintain Favorable Terms from Its Suppliers

 

Blockbuster’s purchasing decisions are influenced by many factors, including predictions of consumer demand, gross margin considerations and supplier product return policies. While much of Blockbuster’s retail movie product in the United States, but not internationally, is returnable to vendors, the increased investment in inventory necessary to capitalize on the growing retail market increases Blockbuster’s exposure to excess inventories in the event anticipated sales fail to materialize. In addition, returns of Blockbuster’s games inventory, which is prone to obsolescence risks because of the nature of the industry, are subject to negotiation with vendors. The prevalence of multiple game platforms may make it more difficult for Blockbuster to accurately predict consumer demand with respect to video games. The nature of and market for Blockbuster’s products, particularly games and DVDs, also makes them prone to risk of theft and loss. Blockbuster’s operating results could suffer if it is not able to:

 

  obtain or maintain favorable terms from its suppliers with respect to such matters as product returns;

 

  maintain adequate copy depth to maintain customer satisfaction;

 

  control shrinkage resulting from theft or loss; or

 

  avoid significant inventory excesses that could force Blockbuster to sell products at a discount or loss.

 

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Blockbuster Is Dependent on the Introduction and Supply of New and Enhanced Game Platforms and Software to Attract and Retain Its Video Game Customers

 

The home video game industry has traditionally been a hit-driven business characterized by short product lifecycles and frequent introduction of new products. Historically, the lifecycle for game platforms has been about five years, with a limited number of platforms achieving success at any given time. The industry typically grows with the introduction of new hardware platforms and games, but tends to slow prior to the introduction of new platforms, as consumers hold back their purchases in anticipation of new platform and game enhancements. Blockbuster’s video games business is, therefore, dependent on the introduction of new and enhanced game platforms and software in order to attract and retain its video game customers. Delays in introduction, slower than expected hardware or software shipments or any failure to obtain sufficient product from Blockbuster’s suppliers on favorable terms could negatively affect Blockbuster’s business or increase fluctuations in Blockbuster’s results of operations.

 

Piracy of the Products Blockbuster Offers or Disregard of Release Dates May Adversely Affect Its Operations

 

Although piracy is illegal, it is a real and significant threat to the home video industry. The development of technology, including digital copying and file compression, and the growing penetration of high-bandwidth Internet connections and ease of networking, increase the threat of piracy by making it easier to duplicate and widely distribute pirated content. Although piracy is a concern in the United States, it is having a more significant adverse affect on the home video industry in international markets. Blockbuster cannot assure you that movie studios and others with rights in the product will take steps to enforce their rights against piracy or that they will be successful in preventing the distribution of pirated content. Increases in piracy could continue to negatively affect Blockbuster’s revenues. In addition, when the studios’ distribution licensees disregard the studios’ release dates and release product to home video retailers other than Blockbuster before the release date, Blockbuster could be adversely affected. Blockbuster cannot assure you that the studios can or will control such distribution licensees, particularly international ones.

 

Blockbuster Cannot Predict the Impact that New or Improved Technologies or Video Formats, Alternative Methods of Product Delivery or Changes in Consumer Behavior Facilitated by These Technologies or Formats and Alternative Methods of Product Delivery May Have on Its Business

 

Advances in technologies such as video-on-demand, new video formats, downloading or alternative methods of product delivery or certain changes in consumer behavior driven by these or other technologies and methods of delivery could have a negative effect on Blockbuster’s business. In particular, Blockbuster’s business could be impacted if:

 

  newly released movies were to be made widely available by the studios to these technologies or these formats at the same time or before they are made available to home video retailers for rental; and

 

  these technologies or new formats were to be widely accepted by consumers.

 

The widespread availability of additional channels on satellite and digital cable systems may significantly reduce public demand for Blockbuster’s products. Advances in direct broadcast satellite and cable technologies may adversely affect public demand for video store rentals. If direct broadcast satellite and digital cable were to become more widely available and accepted, this could cause a smaller number of movies to be rented if viewers were to favor the expanded number of conventional channels and expanded content, including movies, specialty programming and sporting events, offered through these services. If this were to occur, it could have a negative effect on Blockbuster’s video store business. Direct broadcast satellite providers transmit numerous channels of programs by satellite transmission into subscribers’ homes. In addition, cable providers are taking advantage of digital technology to transmit many additional channels of television programs over cable lines to subscribers’ homes.

 

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Because of the increased availability of channels, direct broadcast satellite and digital cable providers have been able to enhance their pay-per-view business by:

 

  substantially increasing the number and variety of movies they can offer their subscribers on a pay-per-view basis; and

 

  providing more frequent and convenient start times for the most popular movies.

 

If these enhanced pay-per-view services were to become more widely available and accepted, pay-per-view purchases could significantly increase. Pay-per-view allows the consumer to avoid trips to the video store for rentals and returns of movies, which also eliminates the chance they will incur additional costs for keeping a movie beyond its initial rental term. However, newly released movies are currently made available by the studios for rental prior to being made available on a pay-per-view basis. Pay-per-view also does not allow the consumer to start, stop and rewind the movie or fully control start times. Increases in the size of the pay-per-view market could lead to an earlier distribution window for movies on pay-per-view if the studios were to perceive this to be a better way to maximize their revenues.

 

Blockbuster’s video store business must compete with the availability of video-on-demand and similar or other technologies, and alternative methods of delivery, which may significantly reduce the demand for Blockbuster’s products or otherwise negatively affect Blockbuster’s business. Any method for delivery of movies or games that serves as an alternative to obtaining that content in Blockbuster’s stores can impact its business. Examples of delivery methods that are currently available on a limited or test basis, but that could impact Blockbuster’s business, are video-on-demand, delivery by mail and online gaming. In addition, technological advances with personal video recorders and disposable DVDs could impact Blockbuster’s business.

 

Video-on-demand. Some digital cable providers and a limited number of Internet content providers have implemented technology referred to as video-on-demand. This technology transmits movies and other entertainment content on demand with interactive capabilities such as start, stop and rewind. In addition, some cable providers have introduced subscription video-on-demand, which allows consumers to pay a flat fee per month for access to a selection of content with fast-forward, stop and rewind capabilities. In addition to being available from most major cable providers in select markets, video-on-demand has been introduced over the Internet, as high-speed Internet access has greatly increased the speed and quality of viewing content, including feature-length movies, on personal computers. Blockbuster has previously tested an entertainment-on-demand service, which delivered video-on-demand to consumers’ television sets via digital subscriber lines and fiber optic connections, and Blockbuster conducts similar tests from time to time. The future of video-on-demand services, including services provided by Blockbuster, is uncertain. Video-on-demand could have a negative effect on Blockbuster’s video store business if:

 

  video-on-demand could be profitably provided at a reasonable price; and

 

  newly released movies were made available at the same time, or before, they were made available to the home video retailers for rental.

 

Delivery by mail. Some companies, including Blockbuster, offer consumers the ability to purchase or rent movies and games through the Internet, with delivery by mail. This includes various online rental subscription programs, which generally do not have extended viewing fees. The convenience offered by this method of product delivery, and the attractiveness to consumers of having no extended viewing fees, could reduce the number of consumers who obtain product from Blockbuster’s stores.

 

Disposable DVDs; personal video recorders. The technology exists for retailers to offer disposable DVDs, which would allow a consumer to view a DVD for an unlimited number of times during a specified period of time, at the end of which the DVD becomes unplayable as a result of chemistry technology. Another technology that could have an effect on Blockbuster’s video store business is the personal video recorder. A personal video recorder allows consumers to automatically and digitally record programs to create a customized television line-

 

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up for viewing at any time. This technology also enables consumers to pause, rewind, instant replay and playback in slow motion any live television broadcast. This technology is also increasingly being used to download movies in a form known as Subscriber Video on Demand. Blockbuster cannot predict the impact that these technologies will have on its business.

 

Blockbuster Could Incur Substantial Costs Defending Itself in any Suits Brought Against Blockbuster Asserting Patent or Other Intellectual Property Rights

 

Netflix, Blockbuster’s primary domestic competitor in online rental, recently stated that it had obtained a patent covering online rental subscription (U.S. Patent No. 6,584,450). While Blockbuster cannot predict with certainty the scope, validity and enforceability of this or any other patent, Blockbuster could nevertheless incur substantial costs in defending itself in any suits brought against Blockbuster asserting patent or other intellectual property rights. If the outcome of any such litigation were to be unfavorable to Blockbuster, its business and results of operations could be materially adversely affected. Blockbuster is not currently aware of any patent that it believes will materially adversely affect its ability to pursue its current and planned business operations.

 

Blockbuster Has Had Limited Experience with Certain New Customer Proposition Initiatives and Cannot Assure You When or if These or Future Initiatives Will Have a Positive Impact on Blockbuster’s Profitability

 

Blockbuster has implemented and will continue to implement initiatives that are designed to enhance efficiency and customer convenience in its stores, and Blockbuster is also continuing to test and implement initiatives such as in-store and online subscription-based rentals, games store-in-stores and trading concepts. The implementation of these and other similar initiatives in Blockbuster’s stores will involve significant investments by Blockbuster of time and money. Because Blockbuster has limited experience with such new initiatives, Blockbuster cannot assure you that they will be successful or profitable either over the short or long term, including success in retaining customers. Blockbuster’s ability to effectively and timely prioritize and implement its initiatives will also affect when and if they will have a positive impact on Blockbuster’s profitability.

 

Any Failure or Inadequacy of Blockbuster’s Information Technology Infrastructure Could Harm Its Business

 

The capacity, reliability and security of Blockbuster’s information technology hardware and software infrastructure and Blockbuster’s ability to expand and update this infrastructure in response to its growth and changing needs are important to the implementation of Blockbuster’s new customer proposition initiatives, as well as the operation of Blockbuster’s business generally. In connection with Blockbuster’s growth and to avoid technology obsolescence and enable future cost savings and customer enhancements, Blockbuster is continually updating its information technology infrastructure. In addition, Blockbuster intends to add new features and functionality to its products, services and systems that could result in the need to develop, license or integrate additional technologies. Blockbuster’s inability to add additional software and hardware or to upgrade its technology infrastructure could have adverse consequences, which could include the delayed implementation of Blockbuster’s new customer proposition initiatives, service interruptions, impaired quality or speed of the users’ experience and the diversion of development resources. Blockbuster’s failure to provide new features or functionality to its systems also could result in these consequences. Blockbuster may not be able to effectively upgrade and expand its systems, or add new systems, in a timely manner or to integrate smoothly any newly developed or purchased technologies with its existing systems. These difficulties could harm or limit Blockbuster’s ability to improve its business.

 

Newly Opened Stores May Adversely Affect the Profitability of Pre-Existing Stores

 

Blockbuster expects to open company-operated stores in markets where it already has significant operations in order to maximize its market share within these markets. Although Blockbuster has a store development

 

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approach that is designed to minimize the effect of newly opened stores on pre-existing stores, Blockbuster cannot assure you that these newly opened stores will not adversely affect the revenues and profitability of those pre-existing stores in any given market.

 

Blockbuster May Be Required to Make Lease Payments Related to Blockbuster Music Stores that Were Sold to Wherehouse Entertainment Inc., Which Is in Chapter 11 Bankruptcy

 

In October 1998, about 380 BLOCKBUSTER MUSIC stores were sold to Wherehouse Entertainment Inc., which is referred to in this Prospectus-Offer to Exchange as “Wherehouse.” Some of the leases transferred in connection with this sale had previously been guaranteed either by Viacom or its affiliates. In connection with Blockbuster’s initial public offering, Blockbuster entered into an Initial Public Offering and Split-Off Agreement with Viacom, pursuant to which Blockbuster agreed to indemnify Viacom with respect to any amount paid under these guarantees. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. On January 21, 2003, Wherehouse filed a petition for protection under Chapter 11 of U.S. bankruptcy law. Based on information regarding lease and guarantee expirations originally available in connection with the Wherehouse bankruptcy, Blockbuster estimated that it was contingently liable for approximately $36.0 million. Of this amount, Blockbuster recorded a reserve of $18.7 million during the fourth quarter of 2002, which represented Blockbuster’s estimate of the lease guarantee obligation at that time. During 2003, Blockbuster paid approximately $8.2 million associated with the lease guarantee obligation. In addition, during the fourth quarter of 2003, based upon Blockbuster’s most current information regarding the bankruptcy proceedings, Blockbuster reduced its reserve by $2.6 million, resulting in a remaining reserve balance of $7.9 million at March 31, 2004. Any payments Blockbuster is required to make under the guarantees in excess of its recorded reserve would negatively affect Blockbuster’s results of operations.

 

Blockbuster’s Business Model Is Substantially Dependent on the Functionality of Its Centralized Domestic and International Distribution Centers

 

Blockbuster’s domestic distribution system is centralized. This means that Blockbuster ships nearly all of the products to its U.S. company-operated stores through Blockbuster’s distribution center. If Blockbuster’s distribution center were to become non-operational for any reason, Blockbuster could incur significantly higher costs and longer lead times associated with distributing Blockbuster’s movies and other products to its stores. In international markets, there are a variety of distribution methodologies utilized with similar risks to those in the United States.

 

Blockbuster’s Financial Results Could be Negatively Impacted by any Impairment of Goodwill or Other Intangible Assets Required by SFAS 142

 

In accordance with SFAS 142, Blockbuster tests goodwill and other intangible assets for impairment during the fourth quarter of each year, and on an interim date should events occur or circumstances change that would require an interim impairment test. A downward revision in the fair value of a reporting unit could result in an impairment of goodwill under SFAS 142 and a non-cash charge would be required. Such a charge could have a significant effect on Blockbuster’s reported net income.

 

Blockbuster’s Financial Results Could be Negatively Impacted by the Application of Future Accounting Policies

 

Blockbuster’s financial results could be negatively impacted by the application of future accounting policies. For example, Blockbuster could be negatively impacted by the required adoption of new accounting pronouncements such as the Financial Accounting Standards Board Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95, or pending legislation such as H.R. 3574, The Stock Option Accounting Reform Act.

 

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Blockbuster Is Subject to Governmental Regulation Particular to the Retail Home Video Industry and Changes in U.S. or International Laws May Adversely Affect Blockbuster

 

Any finding that Blockbuster has been, or is, in noncompliance with respect to the laws affecting its business could result in, among other things, governmental penalties or private litigant damages, which could have a material adverse effect on Blockbuster. Blockbuster is subject to various international and U.S. federal and state laws that govern the offer and sale of Blockbuster’s franchises because Blockbuster acts as a franchisor. In addition, because Blockbuster operates video stores and develops new video stores, Blockbuster is subject to various international and U.S. federal and state laws that govern, among other things, the disclosure and retention of Blockbuster’s video rental records and access and use of its video stores by disabled persons, and are subject to various state and local advertising, consumer protection, licensing, zoning, land use, construction, environmental, health and safety, minimum wage and labor and other employment regulations. The international home video and video game industry varies from country to country due to, among other things, legal standards and regulations, such as those relating to foreign ownership rights; unauthorized copying; intellectual property rights; movie ratings, which in many countries are legal standards unlike the voluntary standards of the United States; labor and employment matters; trade regulation and business practices; franchising and taxation; and format and technical standards. Blockbuster’s obligation to comply with, and the effects of, the above governmental regulations are increased by the magnitude of Blockbuster’s operations.

 

There is also a significant amount of U.S. state and local and international regulation governing trading activities. As Blockbuster continues to develop its movie and games trading model, Blockbuster will incur additional costs to comply with these regulations. In addition, efforts to comply with these regulations could delay Blockbuster’s ability to implement its trading and games initiatives on its proposed schedule.

 

Changes in existing laws, including environmental and employment laws, adoption of new laws or increases in the minimum wage, may increase Blockbuster’s costs or otherwise adversely affect Blockbuster. For example, the repeal or limitation in the United States of the “first sale” doctrine for audiovisual works or for computer software made for limited purpose computers (or, conversely, the creation of a rental right vested in the copyright holder) would have an adverse impact in the United States on Blockbuster’s rental business. In August 2002, the U.S. Copyright Office released its study on the first sale doctrine in the digital age and determined that no changes were warranted. Similarly, the adoption or expansion of laws in any other country to allow copyright owners to charge retailers more for rental product than for sell-through product could have an adverse impact on Blockbuster’s rental business in that country.

 

Any Acquisitions Blockbuster Makes Involve a Degree of Risk

 

Blockbuster has in the past, and may in the future, engage in acquisitions to continue expansion of its domestic and international rental and retail presence. For example, during the past several years, Blockbuster made asset acquisitions of stores in the United States and in markets outside of the United States. In addition, during 2002, Blockbuster acquired all of the capital stock of the second largest games retailer in the United Kingdom and purchased the 51% interest that Blockbuster did not already own in its joint venture based in Italy. If these or any future acquisitions are not successfully integrated with Blockbuster’s business, its ongoing operations could be adversely affected. Additionally, acquisitions may not achieve desired profitability objectives or result in any anticipated successful expansion of the acquired businesses or concepts. Although Blockbuster reviews and analyzes assets or companies it acquires, such reviews are subject to uncertainties and may not reveal all potential risks. Additionally, although Blockbuster attempts to obtain protective contractual provisions, such as representations, warranties and indemnities, in connection with acquisitions, Blockbuster cannot assure you that it can obtain such provisions in its acquisitions or that they will fully protect Blockbuster from unforeseen costs of the acquisition.

 

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As a Result of the Payment of the Special Distribution Blockbuster’s Leverage Will Increase and Blockbuster’s Ability to Make Payments on its Bank Debt will Depend on Blockbuster’s Future Operating Performance Which Will Depend on a Number of Factors That are Outside of Blockbuster’s Control

 

Blockbuster will incur additional debt of $950 million under its new credit agreement in order to pay the special distribution to its stockholders and to finance transaction costs and expenses in connection with the split-off and the special distribution. As of March 31, 2004, on a pro forma basis after giving effect to the special distribution and the borrowings under the new credit agreement, Blockbuster would have had total debt of approximately $1,108.8 million, or approximately [    ]% of Blockbuster’s total capitalization. In addition, Blockbuster would have the $150 million letter of credit provided by Blockbuster to support Viacom’s potential liabilities for certain lease obligations of Blockbuster and other letters of credit issued in the ordinary course of business. See the section entitled “Blockbuster Unaudited Pro Forma Consolidated Condensed Financial Information” beginning on page 84. Blockbuster’s debt service obligations with respect to this new debt will have an adverse impact on its earnings and cash flow for as long as the indebtedness is outstanding. This adverse effect on earnings and cash flow could negatively impact Blockbuster’s stock price.

 

Blockbuster’s ability to make principal and interest payments on its bank debt will depend on Blockbuster’s future operating performance, which will depend on a number of factors, many of which are outside Blockbuster’s control. The degree to which Blockbuster is leveraged could have other important consequences, including the following:

 

  Blockbuster must dedicate a substantial portion of its cash flows from operations to the payment of its indebtedness, reducing the funds available for future working capital requirements, capital expenditures, acquisitions or other general corporate requirements;

 

  some of Blockbuster’s borrowings are, and will continue to be, at variable rates of interest, which may result in higher interest expense in the event of increases in interest rates;

 

  Blockbuster may be more highly leveraged than some of its competitors, which could place it at a competitive disadvantage;

 

  Blockbuster may be more vulnerable to adverse economic and industry conditions; and

 

  Blockbuster’s debt level could limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates.

 

Based upon current levels of operations and anticipated growth, Blockbuster expects to be able to generate sufficient cash flow to make all of the principal and interest payments when such payments are due under Blockbuster’s new credit agreement, but there can be no assurance that Blockbuster will be able to repay such borrowings. See the section entitled “Description of Other Material Agreements—New Blockbuster Credit Agreement” beginning on page 134.

 

The Terms of Blockbuster’s New Credit Agreement Will Impose Many Restrictions on Blockbuster. A Failure by Blockbuster to Comply With Any of These Restrictions Could Result in an Event of Default Under the New Credit Agreement

 

The terms of Blockbuster’s new credit agreement will contain a number of restrictive covenants that will impose significant operating and financial restrictions on Blockbuster, including restrictions on its ability to, among other things:

 

  repurchase or redeem capital stock or subordinated indebtedness;

 

  pay dividends or make distributions to stockholders;

 

  incur or guarantee additional indebtedness;

 

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  create liens;

 

  make investments; and

 

  merge or consolidate with other companies or transfer all or substantially all of its assets.

 

Blockbuster’s new credit agreement will require it to maintain certain financial ratios, some of which may become more restrictive over time. As a result of these covenants and ratios, Blockbuster will be limited in the manner in which it can conduct its business, and may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit Blockbuster’s ability to successfully operate its business.

 

A failure to comply with the covenants or financial ratios contained in Blockbuster’s new credit agreement could lead to an event of default. In the event of any default under Blockbuster’s new credit agreement, the lenders thereunder will not be required to lend any additional amounts to Blockbuster and could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees, to be due and payable, and require Blockbuster to apply all of its available cash to repay these borrowings. An acceleration of indebtedness under the new credit agreement would also likely result in an event of default under the terms of any other financing arrangement Blockbuster had outstanding at such time. If any or all of Blockbuster’s debt were to be accelerated, there can be no assurance that Blockbuster’s assets would be sufficient to repay such indebtedness in full. See the section entitled “Description of Other Material Agreements—New Blockbuster Credit Agreement” beginning on page 134.

 

Blockbuster’s Obligations Pursuant to the IPO Agreement Relating to Certain Real Estate Leases Guaranteed by Viacom May Adversely Affect Blockbuster’s Ability to Negotiate Renewals or Modifications to a Subset of Such Leases

 

The IPO agreement imposes various restrictions and limitations on Blockbuster’s ability to renew or modify, in a manner that increases Viacom’s potential liability, a subset of the leases guaranteed by Viacom, which could make it more difficult and expensive, and in some cases impossible, to renew or modify certain of these leases. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions— Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91.

 

Blockbuster’s Obligations Pursuant to the IPO Agreement to Maintain a Letter of Credit in Favor of Viacom Will Reduce Blockbuster’s Borrowing Capacity

 

Pursuant to the IPO agreement, Blockbuster is obligated to provide at the date of payment of the special distribution a $150 million letter of credit for the benefit of Viacom to support Viacom’s potential liability for certain real estate lease obligations of Blockbuster. Such letter of credit is referred to in this Prospectus-Offer to Exchange as the “Viacom letter of credit.” The Viacom letter of credit will reduce Blockbuster’s borrowing capacity under the terms of its new credit agreement by $150 million. Until the Viacom letter of credit or any renewal thereof is terminated, Blockbuster anticipates any future or additional lenders may treat Blockbuster’s letter of credit obligation as if it were outstanding indebtedness when assessing Blockbuster’s borrowing capacity. Furthermore, if Blockbuster is unable to renew or otherwise replace the Viacom letter of credit prior to its expiration as required by the IPO agreement, Viacom has the right to draw down the full amount of the Viacom letter of credit, which would cause Blockbuster to borrow funds under its new credit agreement to reimburse the letter of credit bank. In either case, any resulting reduction in borrowing capacity could restrict or prevent Blockbuster from being able to borrow amounts necessary to engage in favorable business activities, consummate strategic acquisitions or otherwise fund capital needs. See the sections entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” and “Description of Other Material Agreements—New Blockbuster Credit Agreement” beginning on pages 91 and 134, respectively.

 

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If Blockbuster Loses Key Senior Management or is Unable to Attract and Retain the Talent Required for its Business, its Operating Results Could Suffer

 

Blockbuster’s performance depends largely on the efforts and abilities of its members of senior management. These executives have substantial experience and expertise in Blockbuster’s business and have made significant contributions to its growth and success. The unexpected loss of services of one or more of these individuals could have an adverse effect on Blockbuster’s business. Blockbuster will need to attract and retain additional qualified personnel and develop, train and manage an increasing number of management-level employees. Blockbuster cannot assure you that it will be able to attract and retain personnel as needed in the future. See the section entitled “Interests of Certain Persons—Blockbuster—Employment Arrangements” beginning on page 107.

 

Risk Factors Relating to this Exchange Offer

 

Your Investment Will Be Subject to Different Risks After this Exchange Offer Regardless of Whether You Elect to Participate in This Exchange Offer

 

Your investment will be subject to different risks as a result of this exchange offer, regardless of whether you tender all, some or none of your shares of Viacom class A or class B common stock.

 

  If you exchange all of your shares of Viacom class A or class B common stock and this exchange offer is fully subscribed, you will no longer have an interest in Viacom, but instead will directly own an interest in Blockbuster. As a result, your investment will be subject exclusively to risks associated with Blockbuster and not risks associated with Viacom.

 

  If you exchange some, but not all, of your shares of Viacom class A or class B common stock regardless of whether this exchange offer is fully subscribed, the number of shares of Viacom common stock you own will decrease (unless you acquire Viacom class A or class B common stock other than through this exchange offer), while the number of shares of Blockbuster common stock you own will increase. As a result, your investment will be subject to risks associated with both Viacom and Blockbuster.

 

  If you do not exchange any of your shares of Viacom class A or class B common stock and this exchange offer is fully subscribed, your interest in Viacom will increase on a percentage basis, while your indirect ownership in Blockbuster will be eliminated. As a result, your investment will be subject exclusively to risks associated with Viacom and not risks associated with Blockbuster because shares of Viacom class A or class B common stock will no longer include an investment in the Blockbuster business.

 

  If you remain a stockholder of Viacom following the completion of this exchange offer and Viacom completes the spin-off described under the section entitled “Spin-Off and Dispositions of Blockbuster Common Stock” on page 68, you will receive shares of Blockbuster common stock (and cash in lieu of fractional shares). As a result, your investment will be subject to the risks associated with both Viacom and Blockbuster.

 

Whether or not you tender your shares of Viacom class A or class B common stock, the shares you hold after the completion of this exchange offer will be in a company that is different from the company in which you held shares before the completion of this exchange offer. See the sections entitled “Viacom Unaudited Pro Forma Consolidated Condensed Financial Information” and “Blockbuster Unaudited Pro Forma Consolidated Condensed Financial Information” beginning on pages 76 and 84, respectively.

 

After this Exchange Offer, Blockbuster Will No Longer Have Access to the Financial Strength and Resources of Viacom

 

As a Viacom subsidiary, Blockbuster has had access to Viacom’s financial strength and extensive network of business relationships with companies around the world. Blockbuster has drawn on this resource in developing

 

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its own relationships and contacts and in participating in Viacom’s relationships with third parties. After the completion of this exchange offer, Blockbuster will be an independent company and will no longer be able to benefit from Viacom’s financial strength and resources to the same extent that it could as a majority-owned subsidiary of Viacom.

 

In Connection with this Exchange Offer, Blockbuster Must Replace Services Provided by Viacom

 

Prior to Blockbuster’s initial public offering, Viacom and Blockbuster entered into a number of agreements whereby Viacom agreed to provide certain services to Blockbuster. In connection with this exchange offer, Viacom and Blockbuster have amended these agreements. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster” beginning on page 91 for a description of these agreements. Pursuant to the amended and restated transition services agreement, Viacom will no longer provide certain of these services as of the completion of this exchange offer and no longer provide certain other services as of 90 days following the completion of this exchange offer. Blockbuster cannot assure you that it will be able to obtain replacement services on acceptable terms, if at all, once these services are no longer provided by Viacom.

 

Change of Control Provisions in Blockbuster Contracts Could Adversely Impact Blockbuster

 

As a result of the completion of this exchange offer and any spin-off, more than 80% of the voting control of Blockbuster will be transferred. Under the terms of some of Blockbuster’s leases and other contracts, this transfer may constitute an assignment, or be considered a change of control, of Blockbuster. The failure to obtain consents under a material number of these contracts may adversely affect Blockbuster’s financial performance or results of operations.

 

The Historical Financial Information of Viacom and Blockbuster May Not Be Indicative of Their Results as Separate Companies

 

The historical and pro forma financial information of Viacom and Blockbuster presented in, or incorporated by reference into, this document may not necessarily reflect what the results of operations, financial condition and cash flows of each would have been had the companies been independent entities pursuing independent strategies during the periods presented. As a result, historical financial information is not necessarily indicative of future results of operations, financial condition and cash flows of either Viacom or Blockbuster.

 

A Trading Market May Not Develop for the Shares of Blockbuster Class B Common Stock, Which May Adversely Affect the Market Price

 

There is currently no trading market for Blockbuster class B common stock, and neither Viacom nor Blockbuster can assure you that one will develop or be sustained after this exchange offer. Blockbuster class A common stock is currently listed on the New York Stock Exchange under the symbol “BBI.” Blockbuster intends to apply for listing of the Blockbuster class B common stock on the New York Stock Exchange. Viacom and Blockbuster cannot predict the prices at which the Blockbuster class A or class B common stock will trade after this exchange offer. The exchange ratio has been determined after discussions with Bear Stearns and Goldman Sachs, the co-dealer managers and Viacom’s financial advisors for this exchange offer, and may not bear any relationship to the market price at which the Blockbuster class A or class B common stock will trade after this exchange offer. See the section entitled “The Exchange Offer—Terms of this Exchange Offer” beginning on page 56 for a discussion of the factors that were considered in determining the exchange ratio in this exchange offer.

 

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This Exchange Offer and Related Transactions Will Result in a Substantial Amount of Blockbuster Class A and Class B Common Stock Held by Viacom Entering the Market, Which May Adversely Affect the Market Price of Blockbuster’s Class A and Class B Common Stock. The Prior Performance of Blockbuster’s Class A Common Stock May Not Be Indicative of its Performance After this Exchange Offer

 

Prior to the split-off, Blockbuster was a majority-owned subsidiary of Viacom and only approximately 37.1 million shares of Blockbuster class A common stock (or 20.5% of the total equity value of Blockbuster) were publicly traded. In addition to offering [            ] million shares of Blockbuster class B common stock and [            ] million shares of converted class A common stock in this exchange offer, Viacom intends to dispose of approximately 3.6 million shares of Blockbuster class A common stock it acquired through open market purchases in order to maintain U.S. federal income tax consolidation with Blockbuster. Viacom currently intends to contribute all of these shares to the Viacom Pension Plan and the CBS Combined Pension Plan. Blockbuster has filed a shelf registration statement on Form S-3 in order to facilitate the public resale of these shares by the Viacom Pension Plan and the CBS Combined Pension Plan. Following this exchange offer and any such resales, assuming this exchange offer is fully subscribed, 100% of the total equity of Blockbuster will be publicly traded. The distribution of such a large number of shares of Blockbuster class A common stock and Blockbuster class B common stock could adversely affect the market prices of Blockbuster class A and class B common stock. In addition, prior performance of Blockbuster’s class A common stock may not be indicative of the performance of Blockbuster’s common stock after this exchange offer.

 

There May Be an Adverse Effect on the Price of Blockbuster Class A Common Stock Due to Disparate Voting Rights of Blockbuster Class A Common Stock and Blockbuster Class B Common Stock and, Possibly, Differences in the Liquidity of the Two Classes

 

The differential in the voting rights of Blockbuster class A and class B common stock could adversely affect the price of the Blockbuster class A common stock to the extent that investors or any potential future purchaser of Blockbuster common stock ascribe value to the superior voting rights of the Blockbuster class B common stock. The holders of Blockbuster class A and class B common stock generally have identical rights except that holders of Blockbuster class A common stock are entitled to one vote per share while holders of Blockbuster class B common stock are currently entitled to five votes per share. After completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share. Holders of Blockbuster class A and class B common stock are entitled to separate class votes on amendments to Blockbuster’s certificate of incorporation that would alter or adversely affect the powers, preferences or special rights of the shares of their respective classes. In addition, it is possible that differences in the liquidity between the two classes may develop, which could result in price differences.

 

Blockbuster’s Stock Price May Fluctuate Significantly Following the Split-Off, and You Could Lose All or Part of Your Investment as a Result

 

The price of Blockbuster class A and class B common stock may fluctuate significantly following this exchange offer as a result of many factors in addition to those discussed in the two preceding risk factors. These factors, some or all of which are beyond Blockbuster’s control, include:

 

  actual or anticipated fluctuations in Blockbuster’s operating results;

 

  changes in expectations as to Blockbuster’s future financial performance or changes in financial estimates of securities analysts;

 

  success of Blockbuster’s operating and growth strategies;

 

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  investor anticipation of strategic and technological threats, whether or not warranted by actual events;

 

  operating and stock price performance of other comparable companies; and

 

  realization of any of the risks described in these risk factors.

 

In addition, the stock market recently has experienced extreme volatility that often has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of Blockbuster class A and class B common stock, regardless of Blockbuster’s actual operating performance.

 

Blockbuster’s Anti-takeover Provisions May Delay or Prevent a Change of Control of Blockbuster, Which Could Adversely Affect the Price of Blockbuster Class A and Class B Common Stock

 

The existence of some provisions in Blockbuster’s corporate documents and Delaware law may delay or prevent a change in control of Blockbuster, which could adversely affect the price of Blockbuster class A and class B common stock. Blockbuster’s certificate of incorporation and Blockbuster’s bylaws contain some provisions that may make the acquisition of control of Blockbuster more difficult, including provisions relating to the nomination, election and removal of directors, the structure of the board of directors and limitations on actions by Blockbuster stockholders. In addition, Delaware law also imposes some restrictions on mergers and other business combinations between Blockbuster and any holder of 15% or more of its outstanding class A or class B common stock. See the sections entitled “Description of Capital Stock of Blockbuster” and “Comparison of Stockholder Rights” beginning on pages 120 and 128, respectively, for a summary of these anti-takeover provisions.

 

The Tax Matters Agreement Prohibits Blockbuster from Engaging in Certain Corporate Transactions and Blockbuster May Not Have Adequate Funds to Perform its Indemnity Obligations Under this Agreement

 

Viacom and Blockbuster have entered into an amended and restated tax matters agreement, which requires, among other things, that, until two years after the completion of this exchange offer or, if applicable, the spin-off, Blockbuster cannot voluntarily enter into certain transactions, including certain merger transactions or transactions involving the sale of a significant amount of its capital stock or assets, without Viacom’s consent. In addition, Blockbuster has agreed under this tax matters agreement to indemnify Viacom for any tax liability incurred as a result of the failure of this exchange offer and, if applicable, the spin-off to qualify as a tax-free transaction due to a takeover of Blockbuster or any other transaction involving Blockbuster’s capital stock, assets or businesses, regardless of whether such transaction is within Blockbuster’s control. Blockbuster may not, however, have adequate funds to perform these indemnification obligations. These restrictions and potential liabilities may make Blockbuster less attractive to a potential acquiror and reduce the possibility that an acquiror will propose or seek to effect certain transactions with Blockbuster during the restricted two-year period. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Tax Matters Agreement” beginning on page 100.

 

Market Prices for Shares of Viacom Class A or Class B Common Stock May Decline Following the Completion of this Exchange Offer

 

Investors may purchase shares of Viacom class A or class B common stock in order to participate in this exchange offer, which may have the effect of artificially raising market prices for shares of Viacom class A or class B common stock during the pendency of this exchange offer. Following the completion of this exchange offer, the market prices for shares of Viacom class A or class B common stock may decline because any exchange offer-related demand for shares of Viacom class A or class B common stock will cease. Furthermore, persons who were unable to exchange their shares of Viacom class A or class B common stock for any reason, including proration, may seek to sell these shares in the market, which may also adversely affect the market price

 

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for Viacom class A or class B common stock. Market prices for shares of Viacom class A or class B common stock may also decline following the completion of this exchange offer and any subsequent spin-off because shares of Viacom class A or class B common stock will no longer include an investment in the Blockbuster business.

 

Tendering Stockholders May Receive a Reduced Premium or May Not Receive Any Premium in this Exchange Offer

 

Shares of Viacom class A and class B common stock and Blockbuster class A common stock are traded on the New York Stock Exchange. On June 17, 2004, the last New York Stock Exchange trading day before the date of the initial filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part, the closing prices for Viacom class A common stock, Viacom class B common stock and Blockbuster class A common stock were $37.21, $36.66 and $15.39, respectively. On [        ], 2004, the last New York Stock Exchange trading day before the date of this Prospectus-Offer to Exchange, the closing prices for Viacom class A common stock, Viacom class B common stock and Blockbuster class A common stock were $[            ], $[            ] and $[            ], respectively. Following the completion of this exchange offer, subject to authorization by the New York Stock Exchange, Blockbuster expects that the shares of Blockbuster class B common stock will be listed on the New York Stock Exchange, but there is currently no trading market for Blockbuster class B common stock and neither Viacom nor Blockbuster can assure you that one will develop or be sustained after this exchange offer. In addition, neither Viacom nor Blockbuster can predict the prices at which Blockbuster class A or class B common stock will trade after this exchange offer. Whether Viacom stockholders participating in this exchange offer will receive a premium for their shares of Viacom common stock will depend on the prices for shares of Viacom class A or class B common stock and Blockbuster class A common stock at the expiration date of this exchange offer. Since the market price for shares of Viacom class A and class B common stock and Blockbuster class A common stock fluctuates, Viacom cannot predict the prices at which shares of Viacom class A or class B common stock or Blockbuster class A common stock will be trading at the expiration date of this exchange offer, and therefore Viacom cannot predict whether stockholders who participate in this exchange offer will receive a premium for their shares of Viacom class A or class B common stock or, if they do, the amount of such premium.

 

If this Exchange Offer and Any Spin-Off Are Determined to Be Taxable, Viacom and Tendering Stockholders Could Be Subject to a Material Amount of Taxes

 

Viacom will receive a tax opinion from Cravath, Swaine & Moore LLP to the effect that, for U.S. federal income tax purposes, this exchange offer and, if applicable, the spin-off will be tax-free to Viacom and Viacom stockholders, except with respect to any cash received in lieu of fractional shares of Blockbuster class A or class B common stock. This tax opinion is not binding on the Internal Revenue Service, or IRS, and is subject to certain factual representations and assumptions. If these factual representations and assumptions are incorrect, Viacom could not rely on the tax opinion. If Viacom completes this exchange offer and the spin-off and this exchange offer and the spin-off are determined to be taxable, Viacom and its stockholders who receive shares of Blockbuster class A or class B common stock could be subject to a material amount of taxes. Neither Viacom nor Blockbuster will indemnify any individual stockholder for any taxes that may be incurred in connection with this exchange offer or any spin-off.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This Prospectus-Offer to Exchange and the documents incorporated by reference into this document contain both historical and forward-looking statements. These forward-looking statements are not based on historical facts, but rather reflect Viacom’s and Blockbuster’s current expectations concerning future results and events. Forward-looking statements generally can be identified by the use of statements that include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. Similarly, statements concerning the contemplated special distribution or borrowings by Blockbuster pursuant to the new credit agreement, this exchange offer or agreements or arrangements relating to any of such matters or that describe Viacom’s or Blockbuster’s objectives, plans or goals are or may be forward-looking statements. These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that are difficult to predict and which may cause Viacom’s or Blockbuster’s actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. There may be additional risks, uncertainties and factors that Viacom and Blockbuster do not currently view as material or that are not necessarily known. Viacom and Blockbuster cannot make any assurance that projected results or events will be achieved. The risk factors set forth above in the section entitled “Risk Factors” beginning on page 30, and the matters discussed in the “Disclosure Regarding Forward-Looking Information” sections of Blockbuster’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Blockbuster’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which reports are included in this Prospectus-Offer to Exchange as Annex A and Annex B, respectively, and the matters discussed in the “Cautionary Statement Concerning Forward-Looking Statements” sections of Viacom’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Viacom’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, which reports are incorporated by reference in this Prospectus-Offer to Exchange, among others, could affect future results, causing these results to differ materially from those expressed in Viacom’s and Blockbuster’s forward-looking statements.

 

The forward-looking statements included and incorporated by reference in this document are only made as of the date of this document or the respective documents incorporated by reference herein, as applicable, and neither Viacom nor Blockbuster has any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances.

 

See the sections entitled “Risk Factors” and “Where You Can Find More Information About Viacom and Blockbuster” beginning on pages 30 and 139, respectively.

 

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RECENT DEVELOPMENTS

 

New Viacom Co-Presidents and Co-Chief Operating Officers; New Blockbuster Director

 

On June 1, 2004, Viacom’s board of directors announced that Tom Freston and Leslie Moonves had been appointed co-presidents and co-chief operating officers of Viacom, succeeding Mel Karmazin, who resigned as president and chief operating officer and as a director of Viacom and Blockbuster. Effective as of June 2, 2004, Michael D. Fricklas, executive vice president, general counsel and secretary of Viacom, was elected by Blockbuster’s board of directors to fill the vacancy on Blockbuster’s board of directors resulting from Mr. Karmazin’s resignation.

 

Blockbuster Credit Arrangements

 

On [            ], 2004, Blockbuster paid a special cash distribution of $5.00 per share (approximately $905 million in aggregate) to its stockholders of record on [            ], 2004. Blockbuster funded the special distribution through borrowings under its new credit agreement. See the section entitled “Description of Other Material Agreements—New Blockbuster Credit Agreement” beginning on page 134.

 

Stock Option Adjustment

 

In connection with the special distribution, on [        ], 2004, Blockbuster adjusted its outstanding stock options which allow employees and directors to purchase shares of Blockbuster class A common stock. See the section entitled “Blockbuster Stock Option Matters” beginning on page 69.

 

Dismissal of Securities Lawsuit Against Blockbuster

 

In a lawsuit filed in 2003 and styled In re Blockbuster Inc. Securities Litigation, Blockbuster and certain directors and officers of Blockbuster were named as defendants. The consolidated amended complaint claimed violations of Section 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 for the time period between February 12, 2002 and December 17, 2002. The consolidated amended complaint generally alleged that the defendants made untrue statements of material fact and/or omitted to disclose material facts about the business and operations of Blockbuster. It also alleged that the value of Blockbuster’s common stock was therefore artificially inflated and that certain of the individual defendants sold shares of Blockbuster’s common stock at inflated prices. The plaintiffs sought unspecified compensatory damages. Blockbuster’s motion to dismiss was granted by the federal court and the consolidated amended complaint was dismissed in its entirety, partially with prejudice and partially without prejudice, by Memorandum Opinion and Order dated April 26, 2004. In analyzing the claims asserted, the court ruled that plaintiffs’ claims of nondisclosure were factually unsupported and deficient as a matter of law. To the extent the court did not dismiss plaintiffs’ claims with prejudice, the court gave plaintiffs the opportunity to replead certain claims. The plaintiffs did not file any amended complaint and, on June 2, 2004, the court entered a final judgment in favor of Blockbuster and dismissed all claims with prejudice.

 

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THE TRANSACTION

 

Background of this Exchange Offer

 

In December 1998, following a thorough review of the various alternatives for divesting Viacom’s home video business, Viacom’s board of directors determined that Viacom and Blockbuster would each benefit from being independent publicly held companies. Viacom’s board of directors determined to pursue this objective by undertaking an initial public offering of Blockbuster’s common stock, which would be followed by a split-off of Viacom’s remaining interest in Blockbuster. On August 16, 1999, Blockbuster completed its initial public offering, selling to the public 31 million shares of its class A common stock, representing approximately 18% of its total shares outstanding and about 4% of the total voting power of Blockbuster. Viacom, through its ownership of all of the 144 million shares of Blockbuster class B common stock outstanding, retained approximately 82.3% of the total equity value in, and approximately 95.9% of the total voting power of, Blockbuster.

 

In September 1999, Viacom announced that it would merge with CBS Corporation, a transaction that was consummated on May 4, 2000. The Viacom/CBS merger resulted in a re-evaluation and reprioritization of Viacom’s strategies in light of the new mix of businesses, and, in March 2001, Viacom disclosed that it no longer had any plans to separate Blockbuster from Viacom.

 

Subsequent to that announcement, Viacom’s board of directors and its management periodically have re-evaluated the relationship between Viacom and Blockbuster.

 

In the fall of 2003, following extensive discussions, Viacom’s board of directors authorized Viacom management to explore various alternatives with respect to Viacom’s interest in Blockbuster. Viacom retained Bear Stearns as its financial advisor with respect thereto.

 

Beginning in October 2003, Viacom began to evaluate various financial, legal, tax and other issues raised by potential transaction structures pursuant to which Blockbuster could be separated from Viacom, including a potential sale of Blockbuster to a buyer or group of buyers and a potential split-off. Throughout the next few months, Viacom explored with several third parties the potential acquisition of Blockbuster, and ultimately concluded that Viacom was not interested in proceeding with such a transaction.

 

In November 2003, Viacom’s representatives on Blockbuster’s board of directors suggested that Blockbuster form a committee of directors who were independent, within the meaning of the rules and regulations of the New York Stock Exchange and the Securities and Exchange Commission, and who were otherwise disinterested. Viacom’s representatives suggested the formation of this committee so that, if any proposed transaction involving Viacom’s interest in Blockbuster were to develop, the committee would have had an appropriate amount of time to retain advisors and inform itself appropriately about the factors necessary to promptly evaluate any such transaction. Blockbuster’s board of directors promptly established a special committee comprised of Jackie M. Clegg, Linda Griego and John L. Muething, Blockbuster directors who were and are still independent for purposes of the applicable rules of the Securities and Exchange Commission and New York Stock Exchange and who were and are still deemed to have no special interest different from Blockbuster stockholders in general in any such transaction. The special committee was authorized to evaluate the terms and conditions of any such transaction and report to Blockbuster’s entire board of directors the committee’s recommendations and conclusions. In addition, the special committee was authorized to retain financial and legal advisors of their own selection, and in November 2003, retained Lazard Frères & Co. LLC as financial advisors and the law firms of Hale and Dorr LLP and Richards, Layton & Finger, P.A.

 

On February 10, 2004, Viacom announced that it would pursue the divestiture of its approximately 81.5% interest in Blockbuster. Viacom also announced that it anticipated such divestiture would be effected though a tax-free split-off but that it would also continue to consider other alternatives. Later that day Blockbuster announced that it anticipated that Blockbuster’s board of directors would consider paying a special distribution, subject to financing, to all Blockbuster stockholders, including Viacom.

 

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Beginning in February 2004, Viacom, Blockbuster, the Blockbuster special committee and their respective legal and financial advisors evaluated and discussed possible terms on which Blockbuster could be separated from Viacom other than through a potential sale, including pursuant to an exchange offer similar to the one described in this Prospectus-Offer to Exchange. The parties considered the potential tax treatment of such a transaction, as well as the impact thereof on Blockbuster’s public stockholders, on Blockbuster’s business and financial flexibility, on Blockbuster’s ability to attract and retain qualified employees and on Viacom’s financial objectives. The parties considered and evaluated alternatives with respect to, among other things, the new credit agreement to be entered into by Blockbuster, the aggregate amount of the special distribution, the amount of Blockbuster class B common stock that would be converted to Blockbuster class A common stock, the voting power of Blockbuster’s class B common stock following a transaction, other proposed changes to Blockbuster’s certificate of incorporation and bylaws, the continuation of Viacom’s guarantees of or other credit support to certain Blockbuster leases and potential modifications to other arrangements between Blockbuster and Viacom, including the agreements entered into between Viacom and Blockbuster in connection with Blockbuster’s initial public offering in August 1999 and a then-contemplated split-off, which are referred to in this Prospectus-Offer to Exchange as the “separation agreements.” Throughout this period, the Blockbuster special committee met on numerous occasions with its financial and legal advisors to consider and review the proposed terms of the transaction. In March 2004, Viacom also retained Goldman Sachs as its co-financial advisor, and Blockbuster retained Credit Suisse First Boston LLC to act as its financial advisor. In June 2004, Blockbuster also retained J.P. Morgan Securities Inc. to act as its co-financial advisor.

 

At its meeting on June 16, 2004, the Blockbuster special committee, after review of the terms of the proposed new credit facilities, the special distribution, the various separation agreements described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster,” the amendment and restatement of Blockbuster’s certificate of incorporation and bylaws, certain amendments to various Blockbuster employee benefit programs and a new employment arrangement for Mr. John F. Antioco, Blockbuster’s chairman and chief executive officer, resolved to recommend to Blockbuster’s full board of directors the approval of the proposed new credit facilities, the special distribution (its recommendation regarding the special distribution being subject to a further determination by the Blockbuster special committee prior to the declaration of the special distribution by Blockbuster’s board of directors), the separation agreements, the amendment and restatement of Blockbuster’s certificate of incorporation and bylaws and the filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part. Subsequent to the recommendation of the Blockbuster special committee, at its meeting on June 16, 2004, Blockbuster’s board of directors resolved to approve the proposed new credit facilities, the separation agreements, the amendment and restatement of Blockbuster’s certificate of incorporation and bylaws and the filing of such Registration Statement.

 

On June 16, 2004, Blockbuster entered into a commitment letter with respect to Blockbuster’s new $1.45 billion credit agreement with a syndicate of lenders.

 

On June 17, 2004, a committee of Viacom’s board of directors delegated with the authority to approve the final form of the divestiture of Blockbuster from Viacom approved the divestiture by means of the split-off contemplated by this Prospectus-Offer to Exchange. The committee also approved Viacom’s entry into the various separation agreements described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions” beginning on page 91.

 

On June 18, 2004, Viacom and Blockbuster executed the separation agreements and Blockbuster and Mr. Antioco executed his new employment agreement.

 

On July 20, 2004, Blockbuster’s stockholders approved the Blockbuster charter amendments at Blockbuster’s 2004 annual meeting.

 

On [                ], 2004, Blockbuster entered into the new credit agreement.

 

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On [                ], 2004, the Blockbuster special committee made a further recommendation regarding the payment of a special distribution, and following such recommendation, the Blockbuster board of directors approved a special distribution of $5.00 per share (approximately $905 million in the aggregate) to the holders of its class A and class B common stock. On [                ], 2004, this special distribution was paid to holders of record of Blockbuster class A and class B common stock as of [                ], 2004.

 

Reasons for this Exchange Offer

 

Blockbuster and Viacom have separate objectives. Viacom’s divestiture of Blockbuster is intended to establish each company as an independent entity with the ability to pursue those separate objectives. Each company believes that the split-off will provide numerous corporate benefits to itself and the other, the most important of which are listed below.

 

  Facilitate Viacom’s and Blockbuster’s Respective Expansion and Growth. Viacom and Blockbuster have significantly different competitive strengths and operating strategies, and each company believes that the split-off will strengthen its ability to focus its managerial and financial resources on developing and growing its core businesses. Viacom is a diversified, broad-based media business, and desires to emphasize capital investment opportunities in its core businesses, rather than investing capital in initiatives that would enhance Blockbuster’s growth. Blockbuster is in the rental and retail home video and game industry and shares many more characteristics with other retailers than with Viacom’s other businesses. Blockbuster has a number of strategic initiatives that it is currently pursuing in response to industry changes. For example, Blockbuster has plans to expand its rental subscription programs and to continue to develop its games store-in-store concepts and its movie and games trading model. Execution of these initiatives will move Blockbuster’s business further away from Viacom’s areas of strategic focus.

 

  Resolve Appearance of Competitive Conflicts Involving Blockbuster and Paramount Pictures. Paramount Pictures Corporation, a Viacom subsidiary, is in the motion picture business and competes with other movie studios. As a result, Blockbuster believes that the other movie studios, which supply Blockbuster with its movies, consider Blockbuster’s affiliation with Paramount Pictures to be a conflict of interest. Similarly, because Paramount Pictures supplies movies to Blockbuster’s competitors in the video rental market, Viacom believes that Blockbuster’s competitors, who are customers of Paramount Pictures, view Paramount Pictures as having a conflict of interest. The split-off should eliminate these perceived competitive conflicts.

 

  Facilitate Investment Decisions by Stockholders. Following the split-off, it will be easier for potential investors to assess Viacom and Blockbuster on an independent basis and choose the company in which to invest and in what relative percentages. The split-off is expected to enable Viacom stockholders who currently own an indirect interest in Blockbuster through Viacom to convert their investment to a direct ownership of Blockbuster in a tax-efficient manner.

 

Effects of this Exchange Offer

 

Upon completion of this exchange offer and any subsequent spin-off, Viacom’s financial statements will no longer reflect the assets, liabilities, results of operations or cash flows attributable to Blockbuster. As a result, Blockbuster’s results will no longer be consolidated with those of Viacom for financial reporting purposes. Revenues and operating income attributable to Blockbuster’s operations represented approximately 22% and 11% of Viacom’s consolidated revenues and operating income, respectively, for the period ended March 31, 2004. See the sections entitled “Viacom Unaudited Pro Forma Consolidated Condensed Financial Information” beginning on page 76, and “Risk Factors—Risk Factors Relating to Viacom’s Business—Adverse Changes to Factors Affecting Advertising Sales Could Have a Negative Effect on Viacom’s Revenues” on page 30.

 

You will be affected by this exchange offer as follows:

 

 

Holders who exchange all of their shares of Viacom common stock, if this exchange offer is fully subscribed, will no longer have any ownership interest in Viacom and will have a new direct ownership

 

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interest in Blockbuster. As a result, your investment will be subject exclusively to risks associated with Blockbuster and not risks associated with Viacom.

 

  Holders who exchange some, but not all, of their shares of Viacom common stock regardless of whether this exchange offer is fully subscribed will, absent the acquisition of Viacom class A or class B common stock independent of this exchange offer, own fewer shares of Viacom common stock and more shares of Blockbuster common stock. As a result, your investment will be subject to risks associated with both Viacom and Blockbuster.

 

  Holders who do not exchange any of their shares of Viacom common stock in this exchange offer will have an increased ownership interest, on a percentage basis, in Viacom and will, assuming this exchange offer is fully subscribed, have no indirect ownership interest in Blockbuster. As a result, your investment will be subject exclusively to risks associated with Viacom and not risks associated with Blockbuster because shares of Viacom class A or class B common stock will no longer include an investment in the Blockbuster business.

 

  Holders who remain stockholders of Viacom following the completion of this exchange offer will, if this exchange offer is not fully subscribed and if Viacom completes a spin-off, receive shares of Blockbuster common stock (and cash in lieu of fractional shares). As a result, your investment will be subject to risks associated with both Viacom and Blockbuster.

 

Persons who remain Viacom stockholders after the completion of this exchange offer and the disposition of the remaining shares of Blockbuster class A and class B common stock Viacom owns will own shares in a company that no longer owns any portion of the Blockbuster business.

 

Participation by National Amusements

 

National Amusements, the controlling stockholder of Viacom, will not participate in this exchange offer. As of May 21, 2004, National Amusements beneficially owned shares of Viacom class A common stock representing approximately 71% of the voting power of all classes of Viacom stock, and approximately 11% of Viacom class A and class B common stock on a combined basis. Mr. Sumner M. Redstone, the controlling stockholder of National Amusements, is the chairman of the board and chief executive officer of Viacom. This decision not to participate in this exchange offer is consistent with the fact that National Amusements has never sold or otherwise disposed of its holdings in Viacom. Mr. Redstone is committed to focusing his managerial and financial resources on developing and growing the core businesses of Viacom.

 

Blockbuster Equity Capitalization Following this Exchange Offer

 

Viacom has agreed to convert [            ] shares of Blockbuster class B common stock on a one-for-one basis into shares of Blockbuster class A common stock and offer both classes of stock in this exchange offer such that, following the completion of this exchange offer, Blockbuster will have an equity capitalization that consists of approximately 60% Blockbuster class A common stock and approximately 40% Blockbuster class B common stock. Viacom’s conversion of Blockbuster class B common stock to Blockbuster class A common stock is governed by the IPO agreement. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91.

 

Blockbuster Charter and Bylaw Amendments

 

Subsequent to the recommendation of the Blockbuster special committee, Blockbuster’s board of directors recommended that its stockholders approve certain amendments to its certificate of incorporation and Blockbuster’s stockholders approved these amendments at Blockbuster’s 2004 annual meeting. The Blockbuster

 

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charter amendments will be filed and become effective immediately after Viacom’s acceptance for exchange of shares of Viacom class A and class B common stock pursuant to this exchange offer. The Blockbuster charter amendments provide, among other things, that after completion of the transactions described in this Prospectus-Offer to Exchange, the number of votes per share of Blockbuster class B common stock will be reduced as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. As of the date of this Prospectus-Offer to Exchange, Viacom and Blockbuster anticipate that, following such reduction, each share of Blockbuster class B common stock will be entitled to two votes per share. The Blockbuster charter amendments also remove provisions relating to Viacom as a stockholder of Blockbuster and add other provisions that Blockbuster’s board of directors believes are advisable for a publicly traded company without a controlling stockholder. Blockbuster’s board of directors is also amending its bylaws to remove the provisions relating to Viacom as a stockholder of Blockbuster and add other provisions that Blockbuster’s board of directors believes are advisable for a publicly traded company without a controlling stockholder. For a more complete description of the Blockbuster charter amendments and the amendments to Blockbuster’s bylaws, see the sections entitled “Description of Capital Stock of Blockbuster” and “Comparison of Stockholder Rights” beginning on pages 120 and 128, respectively.

 

Blockbuster Director Resignations

 

Effective as of the time that Viacom owns shares representing not more than 50% of the total voting power of Blockbuster, the members of Blockbuster’s board of directors who are also directors or officers of Viacom will resign from Blockbuster’s board of directors. These individuals are: Mr. Sumner M. Redstone, Chairman of the Board of Directors and Chief Executive Officer of Viacom; Mr. Richard J. Bressler, Senior Executive Vice President and Chief Financial Officer of Viacom; Mr. Philippe P. Dauman, member of Viacom’s board of directors; and Mr. Michael D. Fricklas, Executive Vice President, General Counsel and Secretary of Viacom. In accordance with Blockbuster’s bylaws, these vacancies will be filled by a vote of the majority of the Blockbuster directors remaining in office and/or the authorized number of directors on Blockbuster’s board of directors will be reduced. As of the date of this Prospectus-Offer to Exchange, Blockbuster’s board of directors has not identified the individuals who will fill these vacancies or what changes, if any, it will make to the size of the board of directors.

 

No Appraisal Rights

 

Appraisal is a statutory remedy available to corporate stockholders who object to extraordinary actions taken by their corporation. This remedy allows dissenting stockholders to require the corporation to repurchase their stock at a price equivalent to its value immediately prior to the extraordinary corporate action. No appraisal rights are available to Viacom stockholders or Blockbuster stockholders in connection with this exchange offer.

 

Litigation Relating to this Exchange Offer

 

On February 10, 2004, a Blockbuster stockholder filed a lawsuit in the Court of Chancery of the State of Delaware against Viacom, Blockbuster and the members of Blockbuster’s board of directors. The lawsuit, which is captioned Vogel v. Bressler, et al., C.A. No. 226-N, purports to be brought on behalf of all stockholders of Blockbuster except the defendants and any persons or entities related to or affiliated with the defendants. Plaintiff alleges that the individual defendants and Viacom owe a duty to the public stockholders of Blockbuster not to favor their own interests at the expense of Blockbuster and its stockholders. Plaintiff alleges that the Blockbuster directors have breached their fiduciary duty to the public stockholders of Blockbuster by proposing a transaction that “will flood the market for publicly traded Blockbuster shares and have a dilutive effect on the Blockbuster shares held by the existing minority stockholders.” Plaintiff’s complaint seeks a judgment (1) enjoining the

 

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proposed transaction and, if the transaction is consummated, rescinding the transaction; (2) awarding plaintiff and the class compensatory damages and/or rescissory damages; and (3) awarding plaintiff the costs and disbursements of the action, including attorneys’ and experts’ fees. Plaintiff’s counsel has agreed that defendants are not required to respond or move with respect to the pending complaint. This agreement is without prejudice to plaintiff’s right to amend the complaint and to seek to expedite proceedings on the amended complaint.

 

Regulatory Approval

 

Certain acquisitions of Blockbuster class A and class B common stock under this exchange offer may require a premerger notification filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. If you decide to participate in this exchange offer and consequently acquire enough shares of Blockbuster class A and class B common stock to exceed the $50 million threshold provided for in the Hart-Scott-Rodino Act and associated regulations, and if an exemption under the Hart-Scott-Rodino Act or regulations does not apply, Viacom and you would be required to make filings under the Hart-Scott-Rodino Act and you would be required to pay the applicable filing fee. A filing requirement could delay the exchange of shares with you until the waiting periods in the Hart-Scott-Rodino Act have expired or been terminated.

 

Apart from the registration of shares of Blockbuster class A and class B common stock offered in this exchange offer under federal and state securities laws and Viacom’s filing of a Schedule TO with the Securities and Exchange Commission, which is referred to in this Prospectus-Offer to Exchange as the “SEC”, Viacom does not believe that any other material U.S. federal or state regulatory filings or approvals will be necessary to consummate this exchange offer and any spin-off.

 

Accounting Treatment

 

The shares of Viacom class A and class B common stock received by Viacom pursuant to this exchange offer will be recorded as an acquisition of treasury stock at a cost equal to the market value of the Viacom shares accepted in this exchange offer at the expiration of this exchange offer. Any excess of the net book value of Viacom’s investment in Blockbuster class B common stock over the market value of the shares of Viacom common stock acquired at that date will be recognized by Viacom as a loss on the disposal of the Blockbuster class B common stock after adding direct and incremental expenses of this exchange offer. Depending on the market value and the number of shares of Viacom common stock acquired in this exchange offer, the loss on the disposal may be significant. For example, if shares of Viacom class B common stock have a market value on the expiration date equal to the closing price of the Viacom class B common stock on [            ], 2004 ($[            ]) and [            ] shares of Viacom class A and class B common stock are exchanged for 144,000,000 shares of Blockbuster class A and class B common stock in the aggregate, Viacom estimates that it would realize a loss of approximately $[            ] million. Assuming that [            ] shares of Viacom class A and class B common stock are exchanged for 144,000,000 shares of Blockbuster class A and class B common stock in the aggregate the actual loss will vary by approximately $[            ] million for each $1.00 change in the per share market value of the shares of Viacom class B common stock on the expiration date of this exchange offer.

 

Viacom intends to account for the disposal of its investment in Blockbuster as a discontinued operation for financial statement purposes. Interpretive guidance of authoritative accounting literature relating to discontinued operations is pending and could impact Viacom’s proposed treatment.

 

Tax Treatment

 

See the section entitled “U.S. Federal Income Tax Consequences” beginning on page 105.

 

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THE EXCHANGE OFFER

 

Terms of this Exchange Offer

 

Viacom is offering to exchange up to [            ] shares of Blockbuster class B common stock and [            ] shares of converted class A common stock for the outstanding shares of Viacom class A or class B common stock validly tendered and not properly withdrawn, on the terms and conditions and subject to the limitations described below and in the related letter of transmittal and instruction booklet thereto, by 12:00 midnight, New York City time, on [            ], 2004. The last day on which tenders will be accepted, whether on [            ], 2004 or any later date to which this exchange offer is extended, is referred to in this Prospectus-Offer to Exchange as the “expiration date.” You may tender all, some or none of your shares of Viacom class A or class B common stock.

 

If your shares of Viacom class A or class B common stock are held in a Viacom or Blockbuster employee benefit plan, you will have an earlier deadline for directing the trustee of the plan whether to tender shares held in your plan account. This earlier date will allow the trustees or administrators sufficient time to process the tender instructions and submit them to the exchange agent in a timely manner. Please carefully review the instructions being sent to you from the trustees or administrators of the plans to determine the deadline applicable to your shares held in the plans.

 

Viacom will accept up to [            ] total shares of Viacom class A and class B common stock for exchange. This number of shares multiplied by the exchange ratio equals the [            ] shares of Blockbuster class B common stock and [            ] shares of converted class A common stock held by Viacom. If more than [            ] shares of Viacom class A and class B common stock are validly tendered, the tendered shares will be subject to proration when this exchange offer expires. Viacom’s obligation to complete this exchange offer is subject to important conditions that are described in the section entitled “—Conditions for Completion of this Exchange Offer” beginning on page 64.

 

In determining the exchange ratio, Viacom considered, among other things:

 

  recent and historical market prices on the New York Stock Exchange for shares of Viacom class A and class B common stock and Blockbuster class A common stock; and

 

  discussions with the co-dealer managers as to what exchange ratio might induce Viacom stockholders to tender Viacom class A or class B common stock in this exchange offer so that all (or the greatest percentage) of the shares of Blockbuster class B common stock and converted class A common stock that Viacom holds will be distributed.

 

Viacom is sending this document and related documents to:

 

  persons who directly held shares of either Viacom class A or class B common stock on [            ], 2004, including shares of Viacom common stock held through the Viacom DRP. On that date, there were [            ] shares of Viacom class A common stock outstanding, which were held of record by approximately [            ] stockholders, and [            ] shares of Viacom class B common stock outstanding, which were held of record by approximately [            ] stockholders;

 

  participants who hold shares of either Viacom class A or class B common stock in a Viacom or Blockbuster employee benefit plan that are eligible to be tendered in this exchange offer under the terms of the plans; and

 

  brokers, banks and similar persons whose names or the names of whose nominees appear on Viacom’s stockholder list or, if applicable, who are listed as participants in a clearing agency’s security position listing for subsequent transmittal to beneficial owners of Viacom class A and class B common stock.

 

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Proration; Tenders for Exchange by Holders of Fewer than 100 Shares of Viacom Class A or Class B Common Stock

 

If, as of the expiration of this exchange offer, Viacom stockholders have validly tendered more than [            ] shares of Viacom class A and class B common stock so that more than [            ] shares of Blockbuster class B common stock and [            ] shares of converted class A common stock would be distributed, Viacom will accept on a pro rata basis all shares tendered and not withdrawn, except for tenders of odd-lots, as described below.

 

Except as otherwise provided in this section, beneficial holders of less than 100 shares of either Viacom class A common stock or Viacom class B common stock who validly tender all of their shares of that class may elect not to be subject to proration if more than [            ] shares of Viacom class A and class B common stock are tendered in this exchange offer. Beneficial holders of 100 or more shares of either Viacom class A common stock or Viacom class B common stock are not eligible for this preference with respect to the class in which they hold 100 or more shares, even if these holders have separate stock certificates representing fewer than 100 shares of that class.

 

Any beneficial holder of less than 100 shares of either Viacom class A common stock or Viacom class B common stock who wishes to tender all of these shares must complete the box entitled “Odd-Lot Shares” on the letter of transmittal and, if applicable, on the notice of guaranteed delivery. If your odd-lot shares are held by a broker for your account, you can contact your broker and request the preferential treatment.

 

Viacom will announce the preliminary results of this exchange offer, including the preliminary proration factor, if any, by press release on the first business day after the expiration date. Upon determining the number of shares of Viacom class A and class B common stock validly tendered for exchange, Viacom will announce the final results, including final proration factor, if any, as promptly as practicable after the expiration date.

 

Any shares of Viacom class A or class B common stock not accepted for exchange in this exchange offer will be reissued to the tendering stockholder.

 

For purposes of this exchange offer, a “business day” means any day other than a Saturday, Sunday or federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time.

 

Fractional Shares

 

Fractional shares of Blockbuster class A or class B common stock will not be issued in this exchange offer. The exchange agent, acting as agent for the Viacom stockholders otherwise entitled to receive fractional shares of Blockbuster class A or class B common stock, will aggregate all fractional shares and cause them to be sold in the open market for the accounts of these stockholders. The proceeds that the exchange agent may realize from the sale of the fractional shares of Blockbuster class A and class B common stock will be distributed, net of commissions, to each stockholder entitled thereto in accordance with the stockholder’s fractional interest. None of Viacom, Blockbuster, the exchange agent or the co-dealer managers will guarantee any minimum proceeds from the sale of fractional shares of Blockbuster class A and class B common stock. You will not receive any interest on any cash paid to you, even if there is a delay in making the payment. Generally speaking, a stockholder who receives cash instead of fractional shares of Blockbuster class A or class B common stock will recognize gain or loss on the receipt of the cash to the extent that the cash received exceeds the tax basis that would have been allocated to that stockholder’s fractional shares. You are urged to carefully read the discussion in the section entitled “U.S. Federal Income Tax Consequences” beginning on page 105, and to consult your tax advisor on the consequences to you of this exchange offer.

 

Exchange of Shares of Viacom Common Stock

 

Upon the terms and subject to the conditions of this exchange offer (including, if this exchange offer is extended or amended, the terms and conditions of the extension or amendment), Viacom will accept for

 

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exchange, and will exchange, [            ] shares of Blockbuster class B common stock and [            ] shares of converted class A common stock for each share of Viacom class A or class B common stock validly tendered, and not properly withdrawn, prior to the expiration of this exchange offer, as promptly as practicable after the expiration date. Notwithstanding the immediately preceding sentence, subject to applicable rules of the SEC, Viacom expressly reserves the right to delay acceptance for exchange, or the exchange of, shares of Viacom class A or class B common stock in order to comply with any applicable law or obtain any governmental or regulatory approvals.

 

In all cases, the exchange of shares of Viacom class A or class B common stock tendered and accepted for exchange pursuant to this exchange offer will be made only after timely receipt by the exchange agent of (1) certificates for those shares of Viacom class A or class B common stock (or a confirmation of a book-entry transfer of those shares of Viacom class A or class B common stock in the exchange agent’s account at The Depository Trust Company) pursuant to the procedures set forth in the section entitled “—Procedures for Tendering” beginning on page 58, (2) a properly completed and duly executed letter of transmittal (or a manually signed facsimile of that document), with any required signature guarantees, or, in the case of a book-entry transfer, an agent’s message, and (3) any other required documents.

 

For purposes of this exchange offer, Viacom will be deemed to have accepted for exchange, and thereby exchanged, shares of Viacom class A or class B common stock validly tendered and not properly withdrawn if and when Viacom notifies the exchange agent of its acceptance of the tenders of those shares of Viacom class A or class B common stock pursuant to this exchange offer. The exchange agent will cause shares of Blockbuster class A and class B common stock to be credited to book-entry accounts maintained by Blockbuster’s transfer agent for the benefit of the tendering stockholder in exchange for Viacom shares pursuant to this exchange offer and cash instead of fractional shares of Blockbuster class A and class B common stock as soon as practicable after receipt of Viacom’s notice and determination of the final proration factor. The exchange agent will act as agent for tendering stockholders for the purpose of causing the receipt of Blockbuster class A and class B common stock and any cash to be paid to you in lieu of fractional shares of Blockbuster class A and class B common stock. You will not receive any interest on any cash paid to you, even if there is a delay in making the payment.

 

If Viacom does not accept for exchange any tendered Viacom shares for any reason pursuant to the terms and conditions of this exchange offer, the exchange agent will return certificates for such Viacom shares without expense to the tendering stockholder (or, in the case of Viacom shares tendered by book-entry transfer pursuant to the procedures set forth below in the section entitled “The Exchange Offer—Procedure for Tendering,” such Viacom shares will be credited to an account maintained within The Depository Trust Company), as soon as practicable following expiration or termination of this exchange offer.

 

Procedures for Tendering

 

Shares Held in Certificated Form. If you hold certificates representing shares of Viacom class A or class B common stock, to validly tender such shares pursuant to this exchange offer, you must, prior to the expiration of this exchange offer, deliver to the exchange agent a properly completed and duly executed letter of transmittal (or a manually executed facsimile of that document), along with any required signature guarantees and any other required documents, and the certificates representing the shares of Viacom class A or class B common stock tendered. The exchange agent’s address is listed on the back cover of this Prospectus-Offer to Exchange.

 

If your certificates are not immediately available, you may still tender your shares by complying with the guaranteed delivery procedures set forth below.

 

Shares Held through the Viacom Dividend Reinvestment Plan. If you hold shares of Viacom class A or class B common stock through the Viacom DRP, to validly tender such shares pursuant to this exchange offer, you must, prior to the expiration of this exchange offer, deliver to the exchange agent a properly completed and duly

 

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executed letter of transmittal (or a manually executed facsimile of that document), along with any required signature guarantees and any other required documents. Since certificates are not issued for shares owned pursuant to the Viacom DRP, you do not need to deliver any certificates representing those shares to the exchange agent. The exchange agent’s address is listed on the back cover of this Prospectus-Offer to Exchange.

 

Shares Held Through a Broker. If you hold Viacom class A or class B common stock through a broker, you should follow the instructions sent to you separately by your broker. You should not use the letter of transmittal to direct the tender of your shares of Viacom class A or class B common stock. Your broker must notify The Depository Trust Company and cause it to transfer the shares into the exchange agent’s account in accordance with The Depository Trust Company’s procedures. The broker must also ensure that the exchange agent receives an agent’s message from The Depository Trust Company confirming the book-entry transfer of your shares of Viacom class A or class B common stock. A tender by book-entry transfer will be completed upon receipt by the exchange agent of an agent’s message, book-entry confirmation from The Depository Trust Company and any other required documents.

 

The term “agent’s message” means a message, transmitted by The Depository Trust Company to, and received by, the exchange agent and forming a part of a book-entry confirmation, which states that The Depository Trust Company has received an express acknowledgment from the participant in The Depository Trust Company tendering the Viacom shares which are the subject of the book-entry confirmation, that the participant has received and agrees to be bound by the terms of the letter of transmittal and the related instruction booklet and that Viacom may enforce that agreement against the participant.

 

The exchange agent will establish accounts with respect to the shares of Viacom class A and class B common stock at The Depository Trust Company for purposes of this exchange offer within two business days after the date of this Prospectus-Offer to Exchange, and any financial institution that is a participant in The Depository Trust Company may make book-entry delivery of the shares of Viacom class A or class B common stock by causing The Depository Trust Company to transfer such shares into the exchange agent’s account at The Depository Trust Company in accordance with The Depository Trust Company’s procedure for the transfer. Delivery of documents to The Depository Trust Company does not constitute delivery to the exchange agent.

 

Shares Held Through Viacom or Blockbuster Employee Benefit Plans. If you hold Viacom class A or class B common stock as a participant in a Viacom or Blockbuster employee benefit plan, you should follow the instructions sent to you separately by the plan trustees or administrators. You should not use the letter of transmittal to direct the tender of Viacom class A or class B common stock held in these plans. You may direct the plan trustee to tender none, some or all of the Viacom class A or class B common stock in your employee benefit plan account subject to the limitations set forth below.

 

Participants in the following employee benefit plans may be eligible to participate in this exchange offer:

 

  Viacom 401(k) Plan;

 

  Viacom Employee Savings Plan;

 

  Blockbuster Investment Plan;

 

  Infinity Broadcasting Corporation Union Employees’ 401(k) Plan; and

 

  The Westinghouse Savings Program.

 

However, you will not be eligible to tender in this exchange offer any of the shares of Viacom class A or class B common stock allocated to your employer matching contribution account in the Viacom 401(k) Plan, the Infinity Broadcasting Corporation Union Employees’ 401(k) Plan or the Viacom Employee Savings Plan if your employer matching contribution account is not 100% vested as of [            ], 2004.

 

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General Instructions. Do not send letters of transmittal and certificates for Viacom class A or class B common stock to Viacom, Blockbuster, the co-dealer managers or the information agent. The letters of transmittal and certificates should be sent to the exchange agent at the address listed on the back cover of this Prospectus-Offer to Exchange. Trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity who sign the letter of transmittal, notice of guaranteed delivery or any certificates or stock powers must indicate the capacity in which they are signing and must submit evidence of their power to act in that capacity unless waived by Viacom.

 

Whether you tender your shares of Viacom common stock by delivery of certificates, by transfer of Viacom DRP shares or through your broker, the exchange agent must receive the letter of transmittal and the certificates for your shares of Viacom common stock (or, in case of a book-entry transfer, the agent’s message and a book-entry confirmation) at one of its addresses set forth on the back cover of this Prospectus-Offer to Exchange prior to the expiration of this exchange offer.

 

Please note that if you hold shares of Viacom class A and class B common stock in certificated form and/or through the Viacom DRP, you will receive two letters of transmittal together with this Prospectus-Offer to Exchange. One letter of transmittal is to be used to tender your shares of Viacom class A common stock held in certificated form (and/or through the Viacom DRP) and the other letter of transmittal is to be used to tender your shares of Viacom class B common stock held in certificated form (and/or through the Viacom DRP). If you wish to tender all or some of your shares of Viacom class A common stock and all or some of your shares of Viacom class B common stock, then you must complete both letters of transmittal and return them, together with any other required documents (including share certificates, if applicable), to the exchange agent prior to the expiration of this exchange offer.

 

Signature Guarantees. Signatures on all letters of transmittal must be guaranteed by a firm which is a member of the Security Transfer Agent’s Medallion Signature Program, or by any other “eligible guarantor institution,” as such term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing being an “eligible institution”), except in cases in which shares of Viacom class A or class B common stock are tendered either (1) by a registered Viacom stockholder who has not completed the box entitled “Special Issuance Instructions” on the letter of transmittal, or (2) for the account of an eligible institution.

 

If the certificates for shares of Viacom class A or class B common stock are registered in the name of a person other than the person who signs the letter of transmittal, the certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the certificates, with the signature(s) on the certificates or stock powers guaranteed by an eligible institution.

 

Guaranteed Delivery Procedures. If you wish to tender shares of Viacom class A or class B common stock pursuant to this exchange offer and your certificates are not immediately available or you cannot deliver the certificates and all other required documents to the exchange agent prior to the expiration of this exchange offer, or cannot complete the procedure for book-entry transfer on a timely basis, your shares of Viacom class A or class B common stock may nevertheless be tendered, so long as all of the following conditions are satisfied:

 

  you make your tender by or through an eligible institution;

 

  a properly completed and duly executed notice of guaranteed delivery, substantially in the form made available by Viacom, is received by the exchange agent as provided below on or prior to the expiration of this exchange offer; and

 

  the certificates for all tendered shares of Viacom class A or class B common stock (or a confirmation of a book-entry transfer of such securities into the exchange agent’s account at The Depository Trust Company as described above), in proper form for transfer, together with a properly completed and duly executed letter of transmittal (or a manually signed facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer, an agent’s message) and all other documents required by the letter of transmittal are received by the exchange agent within three New York Stock Exchange trading days after the date of execution of such notice of guaranteed delivery.

 

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You may deliver the notice of guaranteed delivery by hand or transmit it by facsimile transmission or mail to the exchange agent, and you must include a guarantee by an eligible institution in the form set forth in that notice.

 

A tender of shares of Viacom class A or class B common stock pursuant to any of the procedures described above will constitute your acceptance of the terms and conditions of this exchange offer as well as your representation and warranty to Viacom that (1) you have the full power and authority to tender, sell, assign and transfer the tendered shares (and any and all other shares of Viacom class A or class B common stock or other securities issued or issuable in respect of such shares) and (2) when the same are accepted for exchange, Viacom will acquire good and unencumbered title to such shares, true and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims.

 

In all cases, Viacom will exchange shares of Viacom class A or class B common stock tendered and accepted for exchange pursuant to this exchange offer only after timely receipt by the exchange agent of (1) certificates for shares of Viacom class A or class B common stock (or timely confirmation of a book-entry transfer of such securities into the exchange agent’s account at The Depository Trust Company as described above), (2) properly completed and duly executed letter or letters of transmittal (or a manually signed facsimile thereof), along with any required signature guarantees, or an agent’s message in connection with a book-entry transfer, and (3) any other required documents.

 

Appointment of Attorneys-in-Fact and Proxies. By executing a letter of transmittal as set forth above, you irrevocably appoint Viacom’s designees as your attorneys-in-fact and proxies, each with full power of substitution, to the full extent of your rights with respect to your shares of Viacom class A or class B common stock tendered and accepted for exchange by Viacom and with respect to any and all other shares of Viacom class A or class B common stock and other securities issued or issuable in respect of the shares of Viacom class A or class B common stock on or after [            ], 2004. That appointment is effective, and voting rights will be affected, when and only to the extent that Viacom deposits the shares of Blockbuster class A and class B common stock payable as consideration for shares of Viacom class A or class B common stock that you have tendered with the exchange agent. All such proxies shall be considered coupled with an interest in the tendered shares of Viacom class A or class B common stock and therefore shall not be revocable. Upon the effectiveness of such appointment, all prior proxies that you have given will be revoked and you may not give any subsequent proxies (and, if given, they will not be deemed effective). Viacom’s designees will, with respect to the shares of Viacom class A or class B common stock for which the appointment is effective, be empowered, among other things, to exercise all of your voting and other rights as they, in their sole discretion, deem proper at any annual, special or adjourned meeting of Viacom stockholders or otherwise. Viacom reserves the right to require that, in order for shares of Viacom class A or class B common stock to be deemed validly tendered, immediately upon Viacom’s exchange of those shares of Viacom class A or class B common stock, Viacom must be able to exercise full voting rights with respect to such Viacom shares.

 

Determination of Validity. Viacom will determine questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of shares of Viacom class A or class B common stock, in Viacom’s sole discretion, and its determination shall be final and binding. Viacom reserves the absolute right to reject any and all tenders of shares of Viacom class A or class B common stock that it determines are not in proper form or the acceptance of or exchange for which may, in the opinion of its counsel, be unlawful. Viacom also reserves the absolute right to waive any of the conditions of this exchange offer (other than the conditions relating to the absence of an injunction and the effectiveness of the Registration Statement for Blockbuster class A and class B common stock to be issued in this exchange offer), or any defect or irregularity in the tender of any shares of Viacom class A or class B common stock. No tender of shares of Viacom class A or class B common stock is valid until all defects and irregularities in tenders of shares of Viacom class A or class B common

 

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stock have been cured or waived. Neither Viacom nor the exchange agent, the information agent, the co-dealer managers or any other person is under any duty to give notification of any defects or irregularities in the tender of any shares of Viacom class A or class B common stock or will incur any liability for failure to give any such notification. Viacom’s interpretation of the terms and conditions of this exchange offer (including the letter of transmittal and instruction booklet thereto) will be final and binding.

 

Binding Agreement. The tender of shares of Viacom class A or class B common stock pursuant to any of the procedures described above will constitute a binding agreement between Viacom and you upon the terms of and subject to the conditions to this exchange offer.

 

The method of delivery of share certificates of Viacom class A or class B common stock and all other required documents, including delivery through The Depository Trust Company, is at your option and risk, and the delivery will be deemed made only when actually received by the exchange agent. If delivery is by mail, it is recommended that you use registered mail with return receipt requested, properly insured. In all cases, you should allow sufficient time to ensure timely delivery.

 

Lost or Destroyed Certificates

 

If your certificate representing shares of Viacom class A or class B common stock has been mutilated, destroyed, lost or stolen and you wish to tender your shares, you will need to complete the affidavit of lost certificate included on the letter of transmittal. You will also need to pay a surety bond for your lost shares of Viacom common stock if the number of such lost shares is greater than 2,500 shares. Upon receipt of the completed letter of transmittal with the affidavit of lost certificate and the surety bond payment, if applicable, your Viacom class A or class B common stock will be included in this exchange offer.

 

Withdrawal Rights

 

Shares of Viacom class A or class B common stock tendered pursuant to this exchange offer may be withdrawn at any time prior to the expiration date and, unless Viacom has previously accepted them pursuant to this exchange offer, may also be withdrawn at any time after the expiration of 40 business days from the commencement of this exchange offer. Once Viacom accepts shares of Viacom class A or class B common stock pursuant to this exchange offer, your tender is irrevocable.

 

For your withdrawal to be effective, the exchange agent must receive from you a written, telex or facsimile transmission notice of withdrawal at one of its addresses set forth on the back cover of this Prospectus-Offer to Exchange, and your notice must include your name, address, social security number, the certificate number(s) and the number of shares of Viacom class A or class B common stock to be withdrawn, as well as the name of the registered holder, if it is different from that of the person who tendered those shares.

 

A financial institution must guarantee all signatures on the notice of withdrawal, unless those shares of Viacom class A or class B common stock have been tendered for the account of any eligible institution. If certificates have been delivered or otherwise identified to the exchange agent, the name of the registered holder and the serial numbers of the particular certificates evidencing the shares of Viacom class A or class B common stock withdrawn must also be furnished to the exchange agent, as stated above, prior to the physical release of the certificates. If shares of Viacom class A or class B common stock have been tendered pursuant to the procedures for book-entry tender discussed in the section entitled “—Procedures for Tendering” beginning on page 58, any notice of withdrawal must specify the name and number of the account at The Depository Trust Company to be credited with the withdrawn Viacom shares and must otherwise comply with The Depository Trust Company’s procedures.

 

For shares of Viacom class A or class B common stock held through a Viacom or Blockbuster employee benefit plan, please refer to the instructions that will be sent to you separately from the trustees or administrators of these plans for withdrawal instructions.

 

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Viacom will decide all questions as to the form and validity (including time of receipt) of any notice of withdrawal, in its sole discretion, and its decision shall be final and binding. Neither Viacom nor the exchange agent, the information agent, the co-dealer managers nor any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or will incur any liability for failure to give any notification.

 

Any shares of Viacom class A or class B common stock properly withdrawn will be deemed not to have been validly tendered for purposes of this exchange offer. However, you may retender withdrawn shares of Viacom class A or class B common stock by following one of the procedures discussed in the section entitled “—Procedures for Tendering” beginning on page 58 at any time prior to the expiration of this exchange offer (or pursuant to the instructions sent to you separately from the trustees or administrators of the employee benefit plans).

 

Except as otherwise provided above, any tender made under this exchange offer is irrevocable.

 

Book-Entry Accounts

 

Certificates representing shares of Blockbuster class A or class B common stock will not be issued pursuant to this exchange offer. Rather than issuing certificates for such shares to tendering stockholders, the exchange agent will cause shares of Blockbuster class A or class B common stock to be credited to book-entry accounts maintained by Blockbuster’s transfer agent for the benefit of the respective holders. Promptly following the crediting of shares to your respective book-entry accounts, you will receive a statement from Blockbuster’s transfer agent evidencing your holdings, as well as general information on the book-entry form of ownership.

 

You are not required to maintain a book-entry account, and you may obtain a stock certificate for all or a portion of your shares of Blockbuster class A and class B common stock received as part of this exchange offer at no cost to you. Instructions describing how you can obtain stock certificates will be included with the statement mailed to you by Blockbuster’s transfer agent. However, stock certificates for fractional shares will not be issued by either Viacom or Blockbuster. If you request stock certificates and you hold fractional shares, any fractional shares will be sold for your account by Blockbuster’s transfer agent, which will then deliver to you a certificate for the whole number of shares you own and the proceeds from the sale of the fractional shares.

 

Extension; Termination; Amendment

 

Viacom expressly reserves the right, in its sole discretion, for any reason, including the non-satisfaction of any of the conditions for completion of this exchange offer described in the next section entitled “—Conditions for Completion of this Exchange Offer,” including in the event this exchange offer is undersubscribed, to extend the period of time during which this exchange offer is open or to amend the terms of this exchange offer in any respect, including changing the exchange ratio. However, Viacom has certain contractual obligations with Blockbuster with respect to the disposition of its Blockbuster class B common stock and converted class A common stock even if the minimum amount condition and certain other conditions have not been satisfied, as described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91.

 

If Viacom materially changes the terms of or information concerning this exchange offer, it will extend this exchange offer. The SEC has stated that, as a general rule, it believes that an offer should remain open for a minimum of five business days from the date that notice of the material change is first given. The length of time will depend on the particular facts and circumstances. Subject to the preceding paragraph, this exchange offer will be extended so that it remains open for a minimum of ten business days following the announcement if:

 

 

Viacom increases or decreases the number of shares of Blockbuster class A or class B common stock offered in exchange for each share of Viacom class A or class B common stock, the number of shares of

 

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Viacom class A or class B common stock eligible for exchange or either of the co-dealer manager’s fees; and

 

  this exchange offer is scheduled to expire within ten business days of announcing any such increase or decrease.

 

If any of the conditions indicated in the next section entitled, “—Conditions for Completion of this Exchange Offer”, have not been met prior to the expiration of this exchange offer, Viacom expressly reserves the right, in its sole discretion, to extend this exchange offer or to terminate this exchange offer and not accept for exchange any shares of Viacom class A or class B common stock.

 

If Viacom extends this exchange offer, is delayed in accepting any shares of Viacom class A or class B common stock or is unable to accept for exchange any shares of Viacom class A or class B common stock under this exchange offer for any reason, then, without affecting Viacom’s rights under this exchange offer, the exchange agent may, on Viacom’s behalf, retain all shares of Viacom class A or class B common stock tendered. These shares of Viacom class A or class B common stock may not be withdrawn except as provided in the section entitled “—Withdrawal Rights” beginning on page 62. Viacom’s reservation of the right to delay acceptance of any shares of Viacom class A or class B common stock is subject to applicable law, which requires that Viacom pay the consideration offered or return the shares of Viacom class A or class B common stock deposited promptly after the termination or withdrawal of this exchange offer.

 

Viacom will issue a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day following any extension, amendment, non-acceptance or termination of the previously scheduled expiration date. Subject to applicable law (including Rules 13e-4(d), 13e-4(e)(3) and 14e-1 under the Exchange Act, which require that any material change in the information published, sent or given to stockholders in connection with this exchange offer be promptly sent to stockholders in a manner reasonably designed to inform stockholders of the change) and without limiting the manner in which Viacom may choose to make any public announcement, Viacom assumes no obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release to the Dow Jones News Service or the Public Relations Newswire.

 

Conditions for Completion of this Exchange Offer

 

Viacom will not be required to complete this exchange offer unless at least [            ] shares of Viacom class A or class B common stock are validly tendered and not withdrawn prior to the expiration of this exchange offer. This number of shares (the minimum amount) represents about [    ]% of the outstanding shares of Viacom class A and class B common stock as of [            ], 2004, and is enough shares to ensure that at least 60% of the shares of Blockbuster class B common stock and converted class A common stock that Viacom owns are exchanged pursuant to this exchange offer.

 

In addition, Viacom will not be required to accept shares for exchange, and may extend, terminate or amend this exchange offer if:

 

  any condition or event occurs, or Viacom reasonably expects any condition or event to occur, which Viacom reasonably believes would or would be likely to cause this exchange offer to be taxable to Viacom or its stockholders under U.S. federal income tax laws;

 

  Viacom notifies Blockbuster that it is in good faith pursuing a transaction involving Blockbuster (including, without limitation, a merger, consolidation, share sale or exchange, business combination, reorganization or recapitalization) that is reasonably likely to be consummated and is on terms that Viacom and a majority of the independent directors of Blockbuster determine, in their good faith judgment, to be more favorable to Blockbuster’s stockholders than this exchange offer;

 

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  any of the following events has occurred or will imminently occur:

 

  any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States;

 

  any extraordinary or material adverse change in U.S. financial markets generally, including, without limitation, a decline of at least 15% in either the Dow Jones Average of Industrial Stocks or the Standard & Poor’s 500 Index within a period of 60 consecutive days or less occurring after June 18, 2004;

 

  a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States;

 

  a commencement of a war (whether declared or undeclared), armed hostilities or other national or international calamity, including an act of terrorism, directly or indirectly involving the United States, which would reasonably be expected to affect materially and adversely, or to delay materially, the completion of this exchange offer; or

 

  if any of the situations above exists, as of June 18, 2004, the situation deteriorates materially;

 

  there has occurred a material adverse change in the business, condition (financial or other), results of operations or stock price of Blockbuster, which is referred to in this Prospectus-Offer to Exchange as a “Business MAC,” provided that none of the following shall be deemed, in and of itself, to constitute a Business MAC: (1) any change resulting from the transactions contemplated by the IPO agreement, (2) any failure to meet published analyst forecasts, or (3) the recognition of any restructuring or similar accounting charge which does not or will not have any effect on the cash flows of the business after June 18, 2004 ((1) and (2) do not exclude from the definition of a Business MAC the events or factors which may have given rise to (1) or (2), but only (1) or (2) themselves);

 

  there has occurred a material adverse change in the business, prospects, condition (financial or other) or results of operations of Viacom;

 

  there have occurred any breaches of any of Blockbuster’s covenants or agreements with Viacom set forth in the separation agreements described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationship Between Viacom and Blockbuster” beginning on page 91, which breaches in the aggregate have had or are reasonably likely to have a material adverse effect on the expected benefits to Viacom of this exchange offer;

 

  any action, litigation, suit, claim or proceeding is instituted that would be reasonably likely to enjoin, prohibit, restrain, make illegal, make materially more costly or materially delay completion of this exchange offer;

 

  any order, stay, judgment or decree is issued by any U.S. federal or state court, government, governmental authority or other regulatory or administrative authority having jurisdiction over Viacom and Blockbuster and is in effect, or any law, statute, rule, regulation, legislation, interpretation, governmental order or injunction shall have been enacted or enforced, any of which would reasonably be likely to restrain, prohibit or delay completion of this exchange offer or materially impair the contemplated benefits of this exchange offer to Viacom or Blockbuster;

 

  any stop order suspending the effectiveness of the Registration Statement of which this Prospectus-Offer to Exchange is a part has been issued, or any proceeding for that purpose has been initiated by the SEC and not concluded or withdrawn; or

 

  the shares of Blockbuster class B common stock issuable in this exchange offer have not been approved for listing on the New York Stock Exchange, subject to official notice of issuance.

 

If any of the above events occurs, Viacom may:

 

  terminate this exchange offer and as promptly as practicable return all tendered shares of Viacom class A or class B common stock to tendering stockholders;

 

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  extend this exchange offer and, subject to the withdrawal rights described in the section entitled “—Withdrawal Rights” beginning on page 62, retain all tendered shares of Viacom class A or class B common stock until the extended exchange offer expires;

 

  amend the terms of this exchange offer; or

 

  waive the unsatisfied condition and, subject to any requirement to extend the period of time during which this exchange offer is open, complete this exchange offer.

 

These conditions are for the sole benefit of Viacom. Viacom may assert these conditions with respect to all or any portion of this exchange offer regardless of the circumstances giving rise to them. Viacom may waive any condition in whole or in part at any time in its sole discretion, subject to applicable law. Viacom’s failure to exercise its rights under any of the above conditions does not represent a waiver of these rights. Each right is an ongoing right which may be asserted at any time. However, all conditions for completion of this exchange offer must be satisfied or waived by Viacom prior to the expiration of this exchange offer. Any determination by Viacom concerning the conditions described above will be final and binding upon all parties.

 

If a stop order issued by the SEC is in effect with respect to the Registration Statement of which this Prospectus-Offer to Exchange is a part, Viacom will not accept any shares of Viacom class A or class B common stock tendered and will not exchange shares of Blockbuster class A and class B common stock for any shares of Viacom class A or class B common stock.

 

Fees and Expenses

 

Bear Stearns and Goldman Sachs are acting as co-dealer managers in connection with this exchange offer, in which capacity Bear Stearns and Goldman Sachs will, among other things, assist Viacom in connection with this exchange offer. Bear Stearns will receive a customary fee for its services as co-dealer manager and financial advisor to Viacom, in addition to being reimbursed by Viacom for its reasonable out-of-pocket expenses, including attorneys’ fees, in connection with this exchange offer. Goldman Sachs will receive a customary fee for its services as co-dealer manager and financial advisor to Viacom, in addition to being reimbursed by Viacom for its reasonable out-of-pocket expenses, including attorneys’ fees, in connection with this exchange offer. The foregoing fees will be payable if and when this exchange offer is completed. Bear Stearns and Goldman Sachs have provided investment banking services to Viacom and its affiliates and Blockbuster in the past for which Bear Stearns and Goldman Sachs received customary compensation. Additionally, Bear Stearns is currently providing investment banking services to an affiliate of Viacom for which Bear Stearns will receive customary compensation. Alan C. Greenberg, the Chairman of the Executive Committee and a member of the board of directors of Bear Stearns, is a member of Viacom’s board of directors.

 

Viacom has agreed to indemnify Bear Stearns and Goldman Sachs against specified liabilities related to this transaction, including civil liabilities under the federal securities laws, and to contribute to payments which Bear Stearns and Goldman Sachs may be required to make in respect thereof. In the ordinary course of business, Bear Stearns and Goldman Sachs are engaged in securities trading and brokerage activities as well as investment banking and financial advisory services. In the ordinary course of their trading and brokerage activities, Bear Stearns and Goldman Sachs or certain of their respective affiliates may from time to time hold positions of Viacom class A or class B common stock or Blockbuster class A common stock or, after the completion of this exchange offer, Blockbuster class B common stock in their proprietary accounts or those of their customers, and to the extent they hold shares of Viacom class A or class B common stock in these accounts at the time of this exchange offer, Bear Stearns and Goldman Sachs or certain of their respective affiliates may tender these shares.

 

Viacom has retained [            ] to act as the information agent and [            ] to act as the exchange agent in connection with this exchange offer. The information agent may contact holders of shares of Viacom class A or class B common stock by mail, e-mail, telephone, facsimile transmission and personal interviews and may request brokers, dealers and other nominee stockholders to forward materials relating to this exchange offer to

 

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beneficial owners. The information agent and the exchange agent each will receive reasonable compensation for their respective services, will be reimbursed for reasonable out-of-pocket expenses and will be indemnified against liabilities in connection with their services, including liabilities under the federal securities laws.

 

Neither the information agent nor the exchange agent has been retained to make solicitations or recommendations. The fees they receive will not be based on the number of shares of Viacom class A or class B common stock tendered under this exchange offer; however, the exchange agent will be compensated in part on the basis of the number of letters of transmittal received.

 

Viacom will not pay any fees or commissions to any broker or dealer or any other person, other than fees paid to Bear Stearns and Goldman Sachs in connection with this exchange offer, for soliciting tenders of shares of Viacom class A or class B common stock under this exchange offer. Viacom will, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable and necessary costs and expenses incurred by them in forwarding materials to their customers.

 

No broker, dealer, bank, trust company or fiduciary shall be deemed to be Viacom’s agent or the agent of Blockbuster, Bear Stearns, Goldman Sachs, [            ] or [            ] for purposes of this exchange offer.

 

Legal Limitations

 

This document is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of Blockbuster class B common stock or Blockbuster class A common stock in any jurisdiction in which, except as provided below, the offer, sale or exchange is not permitted. Viacom is not aware of any jurisdiction in the United States in which the making of this exchange offer or its acceptance would not be legal. If Viacom learns of any jurisdiction where making this exchange offer or its acceptance would not be permitted, Viacom currently intends to make a good faith effort to comply with the relevant law. If, after such good faith effort, Viacom cannot comply with such law, Viacom will determine whether this exchange offer will be made to and whether tenders will be accepted from or on behalf of persons who are holders of shares of Viacom class A or class B common stock residing in the jurisdiction.

 

In any jurisdiction in which the securities or blue sky laws require this exchange offer to be made by a licensed broker or dealer, this exchange offer may be made on Viacom’s behalf by one or more registered brokers or dealers licensed under the laws of such jurisdiction.

 

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SPIN-OFF AND DISPOSITIONS OF BLOCKBUSTER COMMON STOCK

 

Spin-Off of Blockbuster Class B Common Stock and Converted Class A Common Stock

 

Viacom will dispose of any shares of Blockbuster class B common stock and converted class A common stock it holds following this exchange offer and any spin-off. As soon as practicable following the completion of this exchange offer, Viacom will distribute in a spin-off to its stockholders its remaining shares of Blockbuster class B common stock and converted class A common stock (if any), except that once Viacom has distributed more than 80% of the total voting power of Blockbuster in the aggregate in this exchange offer and any spin-off, Viacom may elect not to distribute its remaining shares in a spin-off so long as such election would not result in an increase in the number of votes per share of Blockbuster class B common stock as compared to the number of votes each share of Blockbuster class B common stock would have had if such shares had been included in any spin-off, in each case after giving effect to the adjustment described in the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Initial Public Offering and Split-Off Agreement” beginning on page 91. If Viacom elects not to distribute its remaining Blockbuster shares in a spin-off, Viacom stockholders who do not participate in this exchange offer will have no direct ownership interest in Blockbuster unless such holders otherwise acquire or have acquired shares of Blockbuster common stock.

 

Fractional shares will not be issued in any spin-off. The exchange agent, acting in its ongoing capacity as transfer agent for the Viacom stockholders otherwise entitled to receive fractional shares, will aggregate all fractional shares and cause them to be sold in the open market for the accounts of these stockholders. The proceeds that the exchange agent may realize from the sale of the fractional shares will be distributed, net of commissions, to each stockholder entitled thereto in accordance with the stockholder’s fractional interest. None of Viacom, Blockbuster, the exchange agent or the co-dealer managers will guarantee any minimum proceeds from the sale of fractional shares of Blockbuster class A or class B common stock, and no interest will be paid on these proceeds. Generally, a stockholder who receives cash instead of fractional shares of Blockbuster class A or class B common stock will recognize gain or loss on the receipt of the cash to the extent that the cash received exceeds the tax basis that would have been allocated to that stockholder’s fractional shares. You are urged to read carefully the discussion in the section titled “U.S. Federal Income Tax Consequences” beginning on page 105 and to consult your tax advisor on the consequences to you of the spin-off.

 

Pursuant to the amended and restated registration rights agreement entered into by Viacom and Blockbuster in connection with this exchange offer, Blockbuster has filed a shelf registration statement on Form S-3 to facilitate the public resale of any Blockbuster class A and class B common stock received in any spin-off by NAIRI, Inc., a wholly owned subsidiary of National Amusements, which is referred to in this Prospectus-Offer to Exchange as “NAIRI,” and Mr. Sumner M. Redstone. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Registration Rights Agreement” on page 100.

 

Disposition of Blockbuster Class A Common Stock

 

Viacom owns approximately 3.6 million shares of Blockbuster class A common stock, which Viacom previously purchased in the open market in order to maintain U.S. federal income tax consolidation with Blockbuster. Viacom intends to dispose of all of these shares prior to the completion of this exchange offer by contributing these shares of Blockbuster class A common stock to the Viacom Pension Plan and the CBS Combined Pension Plan. Pursuant to the amended and restated registration rights agreement entered into by Viacom and Blockbuster in connection with this exchange offer, Blockbuster has filed a shelf registration statement on Form S-3 in order to facilitate the public resale of these shares by the Viacom Pension Plan and the CBS Combined Pension Plan. See the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party Transactions—Relationships Between Viacom and Blockbuster—Registration Rights Agreement” on page 100.

 

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BLOCKBUSTER STOCK OPTION MATTERS

 

Stock Option Adjustment

 

The Senior Executive Compensation Committee of Blockbuster’s board of directors has authority under the Blockbuster Inc. 1999 Long-Term Management Incentive Plan, which is referred to in this Prospectus-Offer to Exchange as the “Blockbuster 1999 Incentive Plan,” to make adjustments to the terms of outstanding stock options previously granted under the plan in the event of a dividend or distribution or other specified transactions. Blockbuster’s stockholders approved an amendment to the Blockbuster 1999 Incentive Plan at Blockbuster’s 2004 annual meeting. The amendment clarifies the manner in which outstanding options are adjusted in the event of an extraordinary cash dividend.

 

Holders of Blockbuster stock options as of the record date for the special distribution will not be entitled to receive the special distribution. However, in order to preserve the value of previously granted options in light of the special distribution, effective as of [            ], 2004, Blockbuster’s Senior Executive Compensation Committee, in accordance with the Blockbuster 1999 Incentive Plan, approved the following adjustments to the outstanding stock options previously granted to optionees under the plan:

 

  the reduction of the exercise price of such stock options to an amount equal to (x) the original exercise price of such stock options multiplied by (y) the ratio of (1) the opening price per share on the ex-dividend date for the special distribution, to (2) the closing price per share on the business day before the ex-dividend date for the special distribution; and

 

  the increase in the number of stock options to an amount equal to (a) the original number of options multiplied by (b) the ratio of (1) the closing price per share on the business day before the ex-dividend date for the special distribution to (2) the opening price per share on the ex-dividend date for the special distribution.

 

The Senior Executive Compensation Committee also approved a corresponding adjustment to the total number of shares available for future grants under the plan. These adjustments were intended to ensure that the economic value of stock options held by Blockbuster’s optionees would be preserved, but not increased, as a result of the special distribution. The Senior Executive Compensation Committee determined this adjustment to be necessary to continue to provide appropriate incentives to Blockbuster’s directors, officers and other optionees, on the same basis as was contemplated when the applicable stock options were granted. Because the special distribution is expected to reduce the trading value of Blockbuster’s class A common stock, failure to adjust the options already awarded would have, in effect, resulted in an upwards repricing of the options. The adjustment will not result in a charge to earnings in Blockbuster’s consolidated financial statements.

 

Restricted Stock Exchange Offer

 

The Senior Executive Compensation Committee of Blockbuster’s board of directors has approved in concept a plan to offer to its employees holding Blockbuster stock options the opportunity, at each optionholder’s election, to exchange all, but not less than all, of their options for restricted stock of Blockbuster. However, optionholders with minimal holdings will likely be offered cash in lieu of restricted stock. A majority of the currently outstanding Blockbuster stock options have exercise prices in excess of Blockbuster’s current stock price. The restricted stock exchange offer is intended to retain and motivate key employees as Blockbuster works toward implementing its new initiatives. Blockbuster expects that, upon completion, the restricted stock exchange offer would reduce the potential additional dilution created by the stock option adjustment referred to in the section above entitled “ —Stock Option Adjustment.”

 

The restricted stock exchange offer would result in a significant non-cash compensation charge to Blockbuster in future periods. The current estimate of this non-cash compensation charge to Blockbuster,

 

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assuming the restricted stock exchange offer is fully subscribed, is approximately $80 to $100 million in the aggregate. The non-cash compensation charge would be recognized over a vesting period of two to three years depending upon the final terms of the restricted stock exchange offer.

 

Blockbuster anticipates that the restricted stock exchange offer would take place after the split-off, but not necessarily after any spin-off. The specific timing and final terms of the restricted stock exchange offer will be determined by Blockbuster’s Senior Executive Compensation Committee.

 

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MARKET PRICES AND DIVIDEND INFORMATION

 

Shares of Viacom Class A and Class B Common Stock and Dividends

 

The following table describes the per share range of high and low sales prices for Viacom class A and class B common stock for the quarterly periods indicated, as reported by the New York Stock Exchange. Shares of Viacom class A and class B common stock are listed on the New York Stock Exchange under the symbols “VIA” and “VIAB,” respectively.

 

    

Voting

Viacom Class A
Common Stock


   

Non-Voting

Viacom Class B
Common Stock


     High

    Low

    High

    Low

2002

                              

First Quarter

   $ 51.89     $ 36.50     $ 51.89     $ 36.40

Second Quarter

     51.36       38.99       51.30       38.80

Third Quarter

     45.00       29.79       44.90       29.75

Fourth Quarter

     47.82       36.95       47.83       36.95

2003

                              

First Quarter

   $ 43.95     $ 33.26     $ 43.96     $ 33.11

Second Quarter

     48.13       36.53       49.75       36.16

Third Quarter

     46.93       37.79       46.95       37.72

Fourth Quarter

     44.67       36.98       44.62       36.87

2004

                              

First Quarter

   $ 45.10     $ 36.76     $ 45.05     $ 36.35

Second Quarter

     42.32       35.80       42.15       35.08

Third Quarter (through July 27, 2004)

     36.74       34.12       35.80       33.56

 

As of [            ], 2004, there were approximately [            ] holders of record of shares of Viacom class A common stock and approximately [            ] holders of record of shares of Viacom class B common stock.

 

On June 17, 2004, the last full day of trading prior to the initial filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part, the closing sales prices per share of Viacom class A and class B common stock as reported by the New York Stock Exchange were $37.21 and $36.66, respectively. On [            ], 2004, the last New York Stock Exchange trading day before the date of this Prospectus-Offer to Exchange, the closing sales prices per share of the Viacom class A and class B common stock as reported by the New York Stock Exchange were $[            ] and $[            ], respectively. The market prices of Viacom class A and class B common stock are subject to fluctuation. As a result, you should obtain current market quotations for the shares of Viacom class A and class B common stock before deciding to tender your shares of Viacom class A or class B common stock. No one can assure you what the market price of shares of Viacom class A or class B common stock will be before, on or after the date on which this exchange offer is completed.

 

In October 2003, Viacom began paying a quarterly cash dividend on Viacom class A and class B common stock of $.06 per share. Dividends were paid on October 1, 2003, January 1, 2004, April 1, 2004 and July 1, 2004 to stockholders of record at the close of business on August 15, 2003, December 8, 2003, February 27, 2004 and June 1, 2004, respectively. On July 21, 2004, Viacom announced that it would pay a quarterly dividend on October 1, 2004 to stockholders of record at the close of business on August 31, 2004. Viacom’s board of directors is free to change its dividend practices from time to time and to decrease or increase the dividend paid, or to not pay a dividend, on its class A and class B common stock on the basis of results of operations, financial condition, cash requirements and future prospects and other factors deemed relevant by its board of directors.

 

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Shares of Blockbuster Class A and Class B Common Stock and Dividends

 

Shares of Blockbuster class A common stock are listed on the New York Stock Exchange under the symbol “BBI.” There has been no historical trading market for the shares of Blockbuster class B common stock because all of the issued and outstanding shares of Blockbuster class B common stock have been held by Viacom or its affiliates at all times since their issuance. Following the completion of this exchange offer, subject to authorization by the New York Stock Exchange, Blockbuster expects that shares of Blockbuster class B common stock will be listed on the New York Stock Exchange. The following table describes the per share range of high and low closing sales prices for shares of Blockbuster class A common stock for the quarterly periods indicated, as reported by the New York Stock Exchange.

 

     Blockbuster Class A
Common Stock


     High

   Low

2002

             

First Quarter

   $ 25.20    $ 17.39

Second Quarter

     30.25      21.90

Third Quarter

     26.81      17.25

Fourth Quarter

     26.80      11.80

2003

             

First Quarter

   $ 17.95    $ 12.21

Second Quarter

     18.60      14.50

Third Quarter

     23.07      15.70

Fourth Quarter

     22.92      16.74

2004

             

First Quarter

   $ 19.06    $ 15.90

Second Quarter

     17.58      14.61

Third Quarter (through July 27, 2004)

     15.05      13.20

 

As of [            ], 2004, there were approximately [            ] holders of record of shares of Blockbuster class A common stock. Viacom currently owns all of the outstanding shares of Blockbuster class B common stock, and immediately prior to the commencement of this exchange offer, Viacom will own approximately 81.5% of the equity value of Blockbuster.

 

On June 17, 2004, the last full day of trading prior to the initial filing of the Registration Statement of which this Prospectus-Offer to Exchange forms a part, the closing sales price per share of Blockbuster class A common stock as reported by the New York Stock Exchange was $15.39. On [        ], 2004, the last New York Stock Exchange trading day before the date of this Prospectus-Offer to Exchange, the closing sales price per share of the Blockbuster class A common stock was $[        ] as reported by the New York Stock Exchange. The market price of Blockbuster class A common stock is subject to fluctuation. As a result, you should obtain current market quotations for the shares of Blockbuster class A common stock before deciding to tender your shares of Viacom class A or class B common stock. No one can assure you what the market price of shares of Blockbuster class A common stock will be before, on or after the date on which this exchange offer is completed. There is no historical trading market for Blockbuster’s class B common stock and no one can assure you what the market price of shares of Blockbuster class B common stock will be after the date on which this exchange offer is completed.

 

Blockbuster has paid and currently intends to pay a quarterly dividend of $0.02 per share on its common stock. On [            ], 2004, Blockbuster paid the special distribution of $5.00 per share (approximately $905 million in the aggregate) to its stockholders of record on [            ], 2004. Blockbuster funded the special distribution through borrowings under its new credit agreement. Blockbuster’s new credit agreement will limit its ability to repurchase common stock and pay dividends other than (i) the special distribution, and (ii) up to an aggregate of (x) $300 million plus (y) 50% of the net income of Blockbuster and its subsidiaries (before deducting provisions required by SFAS 142 or SFAS 123 or non-recurring expenses incurred in connection with the split-off) accruing after December 31, 2004, provided that certain reductions in Blockbuster’s total

 

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leverage ratio have occurred, plus (z) the net cash proceeds of stock issuances by Blockbuster since December 31, 2003. See the section entitled “Description of Other Material Agreements—New Blockbuster Credit Agreement” beginning on page 134. Subject to these limitations, Blockbuster’s board of directors is free to change Blockbuster’s dividend practices from time to time and to decrease or increase the dividend paid, or to not pay a dividend, on Blockbuster’s common stock on the basis of results of operations, financial condition, cash requirements and future prospects and other factors deemed relevant by Blockbuster’s board of directors.

 

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CAPITALIZATION OF VIACOM AND BLOCKBUSTER

 

Viacom

 

The following table sets forth Viacom’s capitalization as of March 31, 2004 on a historical basis, as reported by Viacom, and on a pro forma basis to reflect receipt of the special distribution and the deconsolidation of Blockbuster upon the consummation of this exchange offer. This table should be read together with the sections entitled “Summary—Selected Historical Financial Data for Viacom and Blockbuster” and “Viacom Unaudited Pro Forma Consolidated Condensed Financial Information” beginning on pages 23 and 76, respectively, and the consolidated financial statements and accompanying notes included in Viacom’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 and Viacom’s Annual Report on Form 10-K for the year ended December 31, 2003 for more detailed disclosure on Viacom’s debt structure, which reports are incorporated by reference in this document.

 

    

At March 31, 2004 

(unaudited)


 
(in millions, except per share amounts)    Viacom
Historical


    Viacom
Pro Forma


 

 

Cash and cash equivalents

   $ 1,059.3     $ 1,653.3  
    


 


Debt:

                

Notes payable to banks

   $ 57.1     $ 7.1  

Commercial paper

     20.0       20.0  

Senior debt (4.625% - 8.875% due 2005 - 2051)

     9,284.2       9,284.2  

Senior subordinated debt (10.5% due 2009)

     64.3       64.3  

Other notes

     16.0       1.1  

Obligations under capital leases

     379.1       285.2  
    


 


Total debt

     9,820.7       9,661.9  
    


 


Stockholders’ equity:

                

Class A Common Stock, par value $.01 per share; 750.0 shares authorized; 133.5 shares issued on a historical basis and [    ] shares on a pro forma basis

     1.3       [      ]

Class B Common Stock, par value $.01 per share; 10,000.0 shares authorized; 1,732.3 shares issued on a historical basis and [    ] shares on a pro forma basis

     17.4       [        ]

Additional paid-in capital

     65,878.7       [             ]

Retained earnings

     3,748.6       [             ]

Accumulated other comprehensive loss

     (359.9 )     (327.9 )

Less: Treasury stock

     5,793.1       [             ]
    


 


Total stockholders’ equity

     63,493.0       [             ]
    


 


Total capitalization

   $ 73,313.7     $ [             ]
    


 


 

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Blockbuster

 

The following table sets forth Blockbuster’s capitalization as of March 31, 2004 on a historical basis, as reported by Blockbuster, and on a pro forma basis to reflect additional borrowings, the special distribution, the conversion of shares of Blockbuster class B common stock to Blockbuster class A common stock and other pro forma adjustments. This table should be read together with the sections entitled “Summary—Selected Historical Financial Data for Viacom and Blockbuster” and “Blockbuster Unaudited Pro Forma Consolidated Condensed Financial Information” beginning on pages 23 and 84, respectively, and the consolidated financial statements and accompanying notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Blockbuster’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 and Blockbuster’s Annual Report on Form 10-K for the year ended December 31, 2003 for more detailed disclosure on Blockbuster’s debt structure, which are included in this Prospectus–Offer to Exchange as Annex B and A, respectively.

 

    

At March 31, 2004

(unaudited)


 
(in millions, except per share amounts)    Blockbuster
Historical


    Blockbuster
Pro Forma


 

Cash and cash equivalents

   $ 137.0     $ 172.6  
    


 


Debt:

                

Term loan

   $ 50.0     $ —    

New facility:

                

Tranche A

     —         200.0  

Tranche B

     —         750.0  

Revolving credit facility

     —         50.0  

All other obligations

     14.9       14.9  

Capital lease obligations

     93.9       93.9  
    


 


Total debt

     158.8       1,108.8  
    


 


Stockholders’ equity:

                

Preferred stock, par value $0.01 per share; 100.0 shares authorized; no shares issued or outstanding

     —         —    

Class A common stock, par value $0.01 per share; 400.0 shares authorized; 37.1 shares issued and outstanding on a historical basis and [            ] shares on a pro forma basis

     0.4       [     ]

Class B common stock, par value $0.01 per share; 500.0 shares authorized; 144.0 shares issued and outstanding on a historical basis and [            ] shares on a pro forma basis

     1.4       [     ]

Additional paid-in capital

     6,225.9       5,329.6  

Retained deficit

     (2,826.0 )     (2,829.2 )

Accumulated other comprehensive loss

     (39.3 )     (39.3 )
    


 


Total stockholders’ equity

     3,362.4       2,462.9  
    


 


Total capitalization

   $ 3,521.2     $ 3,571.7  
    


 


 

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VIACOM UNAUDITED PRO FORMA

CONSOLIDATED CONDENSED FINANCIAL INFORMATION

 

The following unaudited pro forma consolidated condensed balance sheet of Viacom as of March 31, 2004 gives effect to the pro forma events described below, as if such events occurred at March 31, 2004. The unaudited pro forma consolidated condensed statements of operations for the three months ended March 31, 2004 and the years ended December 31, 2003, 2002 and 2001 give effect to the pro forma events as if such events occurred at the beginning of the earliest period presented. The unaudited pro forma consolidated condensed financial statements are based upon the historical financial statements of Viacom and Blockbuster for each period presented. In the opinion of Viacom and Blockbuster management, all adjustments and/or disclosures necessary for a fair presentation of the pro forma data have been made.

 

The pro forma events are: (i) Blockbuster’s payment of a special distribution of $5.00 per share to its stockholders; (ii) Viacom’s split-off of Blockbuster as a result of the consummation of this exchange offer;

(iii) the reduction in the number of shares of Viacom common stock outstanding and the weighted average number of such shares outstanding used in the earnings per share calculations as a result of such shares being accepted for exchange in this exchange offer; and (iv) Viacom’s contribution of the Blockbuster class A common shares previously purchased in the open market in order to maintain U.S. federal income tax consolidation of Blockbuster to the Viacom Pension Plan and the CBS Combined Pension Plan.

 

These unaudited pro forma condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or the financial position that would have been achieved had the pro forma events described above been consummated as of the dates indicated or of the results that may be obtained in the future. These unaudited pro forma condensed financial statements and the notes thereto should be read together with:

 

  Blockbuster’s unaudited pro forma condensed financial statements included herein.

 

  Viacom’s consolidated financial statements and the notes thereto as of and for the year ended December 31, 2003, and Management’s Discussion and Analysis included in Viacom’s Annual Report on Form 10-K for the year ended December 31, 2003, which is incorporated by reference into this Prospectus-Offer to Exchange.

 

  Viacom’s consolidated financial statements and the notes thereto as of and for the quarter ended March 31, 2004, and Management’s Discussion and Analysis included in Viacom’s Quarterly Report on Form 10-Q for the period ended March 31, 2004, which is incorporated by reference into this Prospectus-Offer to Exchange.

 

  Blockbuster’s consolidated financial statements and the notes thereto as of and for the year ended December 31, 2003, and Management’s Discussion and Analysis included in Blockbuster’s Annual Report on Form 10-K for the year ended December 31, 2003, included in this Prospectus-Offer to Exchange as Annex A.

 

  Blockbuster’s consolidated financial statements and the notes thereto as of and for the quarter ended March 31, 2004, and Management’s Discussion and Analysis included in Blockbuster’s Quarterly Report on Form 10-Q for the period ended March 31, 2004, included in this Prospectus-Offer to Exchange as Annex B.

 

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Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Balance Sheet

At March 31, 2004

(in millions)

 

    Viacom
Historical


    Blockbuster
Historical


   

Pro Forma

Adjustments


    Effects of
the
Exchange(3)


    Viacom
Pro Forma


 

ASSETS

                                       

Cash and cash equivalents

  $ 1,059.3     $ (137.0 )   $ 737.9  (1)   $     $ 1,653.3  
                      (6.9 )(1)                

Receivables

    3,894.6       (162.2 )     29.1  (2b)           3,761.5  

Inventory

    1,328.1       (417.5 )     (22.2 )(2b)           888.4  

Other current assets

    1,188.8       (161.2 )     17.0 (2c)           1,044.6  
   


 


 


 


 


Total current assets

    7,470.8       (877.9 )     754.9             7,347.8  

Property and equipment, net

    5,891.3       (808.9 )                 5,082.4  

Inventory

    4,749.4       (347.1 )     2.7  (2b)           4,405.0  

Goodwill

    57,032.1       (2,627.7 )     16.1  (2d)           54,420.5  

Intangibles

    12,389.7       (34.5 )                 12,355.2  

Investment in Blockbuster

                2,023.1  (2a)     (2,030.0 )      
                      6.9  (1)                

Other assets

    2,198.2       (51.6 )           [             ]     [             ]
   


 


 


 


 


Total assets

  $ 89,731.5     $ (4,747.7 )   $ 2,803.7     $ [             ]   $ [             ]
   


 


 


 


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                                       

Current portion of long-term debt

  $ 135.6     $ (85.5 )   $     $     $ 50.1  

Accounts payable and accrued expenses

    4,383.7       (1,027.5 )     22.2  (2b)     [             ]     [             ]

Other current liabilities

    2,666.1       (32.3 )     10.7  (2c)           2,673.5  
                      29.0  (2a)                
   


 


 


 


 


Total current liabilities

    7,185.4       (1,145.3 )     61.9       [             ]     [             ]
   


 


 


 


 


Long-term debt

    9,685.1       (73.3 )                 9,611.8  

Other liabilities

    8,722.4       (166.2 )     (19.8 )(2c)     [             ]     [             ]

Minority interest

    645.6       (0.5 )     (465.4 )(2a)           12.3  
                      (167.4 )(1)                

Stockholders’ Equity:

                                       

Common stock

    18.7       (1.8 )     1.8  (2a)     [             ]     [             ]

Additional paid-in capital

    65,878.7       (6,225.9 )     6,225.9  (2a)     [             ]     [             ]

Retained earnings

    3,748.6       2,826.0       (2,826.0 )(2a)     [             ]     [             ]
                              [             ]     [             ]

Accumulated other comprehensive loss

    (359.9 )     39.3       (7.3 )(2a)           (327.9 )
   


 


 


 


 


      69,286.1       (3,362.4 )     3,394.4  (2a)     [             ]     [             ]

Less treasury stock, at cost

    5,793.1                   [             ]     [             ]
   


 


 


 


 


Total stockholders’ equity

    63,493.0       (3,362.4 )     3,394.4       [             ]     [             ]
   


 


 


 


 


Total liabilities and stockholders’ equity

  $ 89,731.5     $ (4,747.7 )   $ 2,803.7     $ [             ]   $ [             ]
   


 


 


 


 


 

The accompanying notes are an integral part of this unaudited pro forma consolidated condensed balance sheet.

 

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Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Statement of Operations

Three Months Ended March 31, 2004

(in millions, except per share amounts)

 

     Viacom
Historical


   

Blockbuster

Historical


   

Pro Forma

Adjustments


    Effects of
the
Exchange


    Viacom
Pro Forma


 

Revenues

   $ 6,772.4     $ (1,503.1 )   $ 29.0 (2b)   $ —       $ 5,298.3  

Operating expenses

     4,289.6       (579.5 )     26.1 (2b)     —         3,736.2  

Selling, general and administrative expenses

     1,051.8       (739.1 )     0.2 (2b)     —         313.7  
                       0.8 (2e)                

Depreciation and amortization

     251.5       (59.6 )     —         —         191.9  
    


 


 


 


 


Operating income

     1,179.5       (124.9 )     1.9       —         1,056.5  
    


 


 


 


 


Interest expense, net

     (179.1 )     3.9       —         —         (175.2 )

Other items, net

     (11.6 )     0.6       —         —         (11.0 )
    


 


 


 


 


Earnings before income taxes

     988.8       (120.4 )     1.9       —         870.3  
    


 


 


 


 


Provision for income taxes

     (254.8 )     7.8       (1.1 )(4)     —         (248.1 )

Equity in loss of affiliates, net of tax

     (2.1 )     —         —         —         (2.1 )

Minority interest, net of tax

     (21.4 )     —         20.1 (2a)     —         (1.3 )
    


 


 


 


 


Net earnings before cumulative effect of accounting change

   $ 710.5     $ (112.6 )   $ 20.9     $ —       $ 618.8  
    


 


 


 


 


Net earnings before cumulative effect per common share:

                                        

Basic

   $ 0.41                             $ [             ]

Diluted

   $ 0.41                             $ [             ]

Weighted average number of common shares:

                                        

Basic

     1,731.0                       (             )(3)     [             ]

Diluted

     1,744.5                       (             )(3)     [             ]

 

 

 

The accompanying notes are an integral part of this unaudited pro forma consolidated condensed statement of operations.

 

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Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Statement of Operations

Year Ended December 31, 2003

(in millions, except per share amounts)

 

     Viacom
Historical


    Blockbuster
Historical


   

Pro Forma

Adjustments


    Effects of
the
Exchange


    Viacom
Pro Forma


 

Revenues

   $ 26,585.3     $ (5,911.7 )   $ 154.0  (2b)   $ —      $ 20,827.6  

Operating expenses

     16,253.7       (2,389.8 )     133.9  (2b)     —        13,997.8  

Selling, general and administrative expenses

     4,374.7       (2,804.3 )     14.1  (2b)             1,587.7  
                       3.2  (2e)                

Impairment and restructuring charges

     1,331.3       (1,304.9 )     —        —        26.4  

Depreciation and amortization

     999.8       (257.9 )     —        —        741.9  
    


 


 


 


 


Operating income

     3,625.8       845.2       2.8       —        4,473.8  
    


 


 


 


 


Interest expense, net

     (761.2 )     30.0             —        (731.2 )

Other items, net

     (3.4 )     0.4             —        (3.0 )
    


 


 


 


 


Earnings before income taxes

     2,861.2       875.6       2.8       —        3,739.6  
    


 


 


 


 


Provision for income taxes

     (1,599.0 )     103.2       (2.4 )(4)     —        (1,498.2 )

Equity in earnings of affiliates, net of tax

     (0.6 )     0.7       —        —        0.1  

Minority interest, net of tax

     173.8       —        (178.5 )(2a)     —        (4.7 )
    


 


 


 


 


Net earnings before cumulative effect of accounting change

   $ 1,435.4     $ 979.5     $ (178.1 )   $ —      $ 2,236.8  
    


 


 


 


 


Net earnings before cumulative effect per common share:

                                        

Basic

   $ 0.82                             $ [             ]

Diluted

   $ 0.82                             $ [             ]

Weighted average number of common shares:

                                        

Basic

     1,744.0                       (             )(3)     [             ]

Diluted

     1,760.7                       (             )(3)     [             ]

 

The accompanying notes are an integral part of this unaudited pro forma consolidated condensed statement of operations.

 

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Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Statement of Operations

Year Ended December 31, 2002

(in millions, except per share amounts)

 

    Viacom
Historical


    Blockbuster
Historical


    Pro Forma
Adjustments


    Effects of
the
Exchange


    Viacom
Pro Forma


 

Revenues

  $ 24,605.7     $ (5,565.9 )   $ 147.0  (2b)   $     $ 19,186.8  

Operating expenses

    14,865.1       (2,358.7 )     157.9  (2b)           12,664.3  

Selling, general and administrative expenses

    4,198.3       (2,636.3 )     22.5  (2b)           1,587.7  
                      3.2  (2e)                

Depreciation and amortization

    945.6       (233.8 )                 711.8  
   


 


 


 


 


Operating income

    4,596.7       (337.1 )     (36.6 )           4,223.0  
   


 


 


 


 


Interest expense, net

    (832.5 )     45.4                   (787.1 )

Other items, net

    (30.0 )     (2.9 )                 (32.9 )
   


 


 


 


 


Earnings before income taxes

    3,734.2       (294.6 )     (36.6 )           3,403.0  
   


 


 


 


 


Provision for income taxes

    (1,448.9 )     103.0       13.5  (4)           (1,332.4 )

Equity in loss of affiliates, net of tax

    (39.5 )     2.2                   (37.3 )

Minority interest, net of tax

    (39.2 )           35.9  (2a)           (3.3 )
   


 


 


 


 


Net earnings before cumulative effect of accounting change

  $ 2,206.6     $ (189.4 )   $ 12.8     $     $ 2,030.0  
   


 


 


 


 


Net earnings before cumulative effect per common share:

                                       

Basic

  $ 1.26                             $ [             ]

Diluted

  $ 1.24                             $ [             ]

Weighted average number of common shares:

                                       

Basic

    1,752.8                       (             )(3)     [             ]

Diluted

    1,774.8                       (             )(3)     [             ]

 

 

The accompanying notes are an integral part of this

unaudited pro forma consolidated condensed statement of operations.

 

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Viacom Inc.

Unaudited Pro Forma Consolidated Condensed Statement of Operations

Year Ended December 31, 2001

(in millions, except per share amounts)

 

     Viacom
Historical


    Blockbuster
Historical


   

Pro Forma

Adjustments


    Effects of
the
Exchange


    Viacom
Pro Forma


 

Revenues

   $ 23,222.8     $ (5,156.7 )   $ 174.3 (2b)   $     $ 18,240.4  

Operating expenses

     14,463.8       (2,420.7 )     172.9 (2b)           12,216.0  

Selling, general and administrative expenses

     4,092.4       (2,531.9 )     0.1 (2b)           1,563.8  
                       3.2 (2e)                

Impairment and restructuring charges

     119.4                         119.4  

Depreciation and amortization

     3,087.0       (423.7 )                 2,663.3  
    


 


 


 


 


Operating income

     1,460.2       219.6       (1.9 )           1,677.9  
    


 


 


 


 


Interest expense, net

     (938.6 )     72.1                   (866.5 )

Other items, net

     254.7       5.2                   259.9  
    


 


 


 


 


Earnings before income taxes

     776.3       296.9       (1.9 )           1,071.3  
    


 


 


 


 


Provision for income taxes

     (919.9 )     (56.1 )     (0.5 )(4)           (976.5 )

Equity in loss of affiliates, net of tax

     (127.0 )     (0.5 )                 (127.5 )

Minority interest, net of tax

     47.1             (43.6 )(2a)           3.5  
    


 


 


 


 


Net loss before cumulative effect of accounting change

   $ (223.5 )   $ 240.3     $ (46.0 )   $     $ (29.2 )
    


 


 


 


 


Net loss before cumulative effect per common share:

                                        

Basic

   $ (0.13 )                           $ [             ]

Diluted

   $ (0.13 )                           $ [             ]

Weighted average number of common shares:

                                        

Basic

     1,731.6                       (             )(3)     [             ]

Diluted

     1,731.6                       (             )(3)     [             ]

 

 

The accompanying notes are an integral part of this

unaudited pro forma consolidated condensed statement of operations.

 

81


Table of Contents

NOTES TO VIACOM UNAUDITED PRO FORMA

CONSOLIDATED CONDENSED FINANCIAL INFORMATION

 

(tables in millions, except per share amounts)

 

(1)    Special Distribution

 

Prior to the commencement of this exchange offer, Blockbuster will pay a special distribution of $5.00 per share (approximately $905 million in the aggregate) to its stockholders:

 

Special distribution of $5.00 per share to Viacom—3,576,145 shares of Blockbuster class A common stock and 144,000,000 shares of Blockbuster class B common stock

   $ 737.9

Special distribution of $5.00 per share to ot